Global minimum 15 per cent corporate tax rate – Australia moves closer to implementation

Pillar Two reform - Australia expected to enact global minimum corporate tax rate from 2024

As outlined in our earlier article, Australia and over 135 jurisdictions in October 2021  endorsed and signed up to proposed international corporate tax reforms that seek to ensure multinational corporate groups pay a minimum effective 15 per cent tax rate across the jurisdictions in which they operate. In essence the measures are intended to take tax rates out of the equation, or at least lessen their impact, when it comes to choosing where to operate and locate mobile capital. It also goes to remove concerns around the use of low or no tax jurisdictions – so called tax havens.

The global minimum corporate tax rate measures that would apply to groups with global revenues in excess of EUR 750m were initially forecast by the OECD to raise an additional $150b of tax revenues. That figure was revised in January to $220b.

The Albanese Labor government committed to implementing the proposed Pillar Two changes as part of its election platform. In October of last year Treasury released a consultation paper seeking feedback from the Australian business community with respect to domestic implementation of the measures, ways to minimise compliance costs, and the possibility of implementing a Domestic Minimum Tax (that would essentially ensure Australia does not lose tax revenue). The consultation paper affirmed the Government’s intention to implement the measures:

“The Government’s ongoing engagement on the multilateral two-pillar solution complements the Government’s election commitment to implement a multinational tax avoidance package. The Government is progressing a set of measures which target the deliberate activities of multinationals to minimise tax, and enhance public reporting (transparency) initiatives to maintain public trust in the integrity of the tax system. As announced before the election, the Government is committed to closing loopholes exploited by multinationals and to improving transparency of business arrangements.”

While the OECD has indicated it expects the measures will come into effect in 2023, the consultation paper expressly recognises there is a widely held expectation that a critical mass of countries will implement in 2024. It is expected that Australia will follow suit, and we could see domestic legislation introduced sometime this year.

OECD releases implementation package dealing with safe harbours, information returns, and tax certainty measures

On 20 December 2022 the OECD released a final part of its implementation package that dealt with transitional and permanent safe harbours and penalty relief, public consultation on the required tax filings (the so called Global Anti-Base Erosion (GloBE) information return), and public consultation on tax certainty matters. Details of these measures can be seen here.

Safe harbours

Of critical importance to MNE groups are the proposed transitional safe harbours that may operate to relieve significant compliance costs where a group operates in perceived lower risk jurisdictions. The measures adopt simpler calculations (as opposed to proposed Pillar Two effective tax rate calculations), and are calculated from more readily available information, namely financial statements and country-by-country reports.

Where one of the safe harbours is met for a particular jurisdiction, no top up tax, usually at the ultimate parent level, applies for that jurisdiction.  The transitional safe harbours apply for years beginning on or before 31 December 2026 and ending on or before 30 June 2028. The safe harbours in summary are:

• The MNE must not have revenue of more than €10m and a profit (loss) before tax of more than €1m in relevant territory (de minimis test); or
• The MNE must have a (simplified) effective tax rate in the relevant territory of equal or more than 15 per cent, 16 per cent, 17 per cent in the fiscal years beginning in 2023 (and 2024), 2025, 2026 respectively (simplified ETR test); or
• The MNE must have profit (loss) before tax in the relevant territory equal to, or less than the Substance-Based Income Exclusion as calculated under the Pillar Two rules (routine profits test).

The OECD further discussed in its December release the form of potential permanent safe harbours. The form of these important compliance savings measures will be of paramount importance and particularly relevant in high tax jurisdictions such as Australia.

Increased compliance costs – Information return

Increased effective group tax rates aside, perhaps the most daunting of prospects for MNEs is the amount of additional compliance required to comply with the new rules. As part of the OECDs December implementation package comments were provided around the form of the GloBE information return (and the relevant information to be included). The information return will generally be required to be filed in the jurisdiction of the ultimate parent entity, but will be automatically exchanged with relevant tax authorities in other jurisdictions in which the MNE operates.

The deadline for lodgement is 15 months from year end, with an initial 18 month timeframe from year end for the first year the rules apply.

For already overwhelmed MNEs dealing with a host of legal and tax changes across the globe, let alone day to day trading issues, the Pillar Two rules and additional compliance burden will be an unwelcome addition to the to do list. Treasury in its consultation paper acknowledged this and commented that “the compliance costs of Pillar Two for Australian businesses are expected to be significant.” 

Further details on the information return are expected from the OECD going forwards.

Next steps

Various facets of the Pillar Two reform measures including the final form of the safe harbours and information return will continue to undergo development. The imposition of the global minimum tax appears imminent but there is still a lot of work to do to finalise exact details.

Under its commitment with the OECD Pillar Two reforms Australia will be required to legislate domestically the reform measures. The form of the domestic legislation is required to be consistent with the GloBE Model Rules, Commentary and Examples agreed as part of the Inclusive Framework.

Given Labor government sentiment and its election platform based on the taxation of multinationals, it seems a matter of time before such measures are enacted.

Further detail of Australia’s adoption of the measures is likely in the upcoming Federal Budget.

What the OECD implementation package means for you

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