Global tax

Federal Budget Tax | Analysis and insights

Key highlights

- Australia will implement key aspects of the OECD’s ‘Pillar Two’ framework, including a domestic minimum tax, with an effective date for some measures from 1 January 2024.
- Affected taxpayers will need to act quickly to ensure they have the data needed to forecast and model the impacts of the new rules in the interim, as well as to maintain reporting and compliance requirements upon enactment.

The Government remains committed to its pre-election promises to make changes to multinational taxation with further changes announced in the 2023-24 Federal Budget. Significantly, this includes confirmation of the start date for the ‘Pillar Two’ changes - originating from the Organisation of Economic Cooperation and Development (OECD) - in Australia.

Implementation of Pillar Two in Australia

As expected, the Government announced the final countdown for multinational enterprises operating in Australia to prepare for unprecedented changes to the global tax system. Australia will be implementing the Global Anti-Base Erosion (GloBE) Rules, a key component of the OECD’s ‘Pillar Two’ framework, with an effective date for some measures of income years commencing on or after 1 January 2024.

What are the GloBE Rules?

The GloBE Rules aim to ensure that large multinational enterprises pay a minimum level of tax in the jurisdictions in which they operate by including new taxing rights over undertaxed profits of any entity within a multinational group with global revenue of at least €750 million per annum (approximately $1.2 billion) which are taxed below the globally agreed minimum tax rate of 15 per cent. This threshold is different to the existing “significant global entity” concept (which broadly refers to a group with annual global income of $1 billion or more).

Whilst not directly addressed in the Budget announcement, commentary from the OECD provides that a group’s global revenue for the purposes of the GloBE Rules will be determined by reference to the group’s consolidated financial statements.

The GloBE Rules, which will impose a top-up tax for the difference between the jurisdictional effective tax rate and the 15 per cent minimum rate, consist of:

the Income Inclusion Rule (IIR), effective for income years commencing on or after 1 January 2024, which will provide Australia with the ability to collect an allocation of top-up tax where the group’s ultimate parent entity, or sometimes an intermediate parent entity, is located in Australia, and
the Undertaxed Profits Rule (UTPR) (formerly known as the ‘Undertaxed Payments Rule’), effective for income years commencing on or after 1 January 2025, which is intended to apply as a backstop if low-taxed income is not fully collected under the IIR and which can be applied in the jurisdictions of fellow group members.

The Government has also announced that it will implement a domestic minimum tax of 15 per cent. This tax will apply to Australian operations of multinationals and will ensure that Australia retains taxing rights over undertaxed Australian profits. Unlike taxes collected under the IIR and UTPR, the domestic minimum tax is intended to give rise to franking credits, subject to OECD peer review.

The Government has indicated that draft legislation and explanatory materials will be released for public comment. As required by the OECD, the final legislation will be submitted to an OECD peer review process to assess if it is consistent with the GloBE Model Rules.

Whilst each country’s domestic Pillar Two legislation will be based on the OECD developed Model Rules, some divergence between countries appears inevitable and it is likely that Australian taxpayers above or near the revenue threshold will need to, at a minimum, consider the Australian domestic minimum tax and also prepare an Australian ‘GloBE Information Return’.

The Government has also stated that, during implementation, it will further consider the interactions with Australia’s existing tax laws and the additional measures noted below that were announced in the October 2022-23 Budget.

This is more than a mere update to Australia’s tax law. Preparing for this new international tax system will be a significant undertaking for impacted taxpayers.

What do I need to do now?

Now that substantial enactment of the GloBE Rules is one step closer, impacted taxpayers will need to consider financial statement disclosure requirements (potentially as early as 2023), the timing of which means that the first GloBE calculations are likely required well in advance of any filing obligation.

The impact of Pillar Two on the end-to-end operations of the tax department will be significant. Taxpayers will need to ensure they have the data needed to forecast and model the impacts of the new rules in the interim, as well as to maintain reporting and compliance requirements upon enactment. In addition to tax, there are several key stakeholder groups within an organisation, including Controllership and Financial Planning & Analysis, legal and IT that will be impacted by the impending changes.

Given the tight timeline, the key actions for groups falling within the scope of the Pillar Two rules will be to undertake an initial impact assessment, prepare resources for the additional compliance requirements, communicate the effects to stakeholders and train teams.

For affected taxpayers, understanding the data requirements of Pillar Two is pivotal in preparing for these upcoming changes. With an effective date of 1 January 2024 and the volume of data required, even the most mature and well-administered taxpayers should not delay.

PwC’s Data Input Catalog is at the centre of PwC’s end-to-end process for Pillar Two. The Data Input Catalog defines the data requirements for Pillar Two, giving affected taxpayers a comprehensive understanding of the amount of work that lies ahead of them and can help anticipate the unique challenges they will face. Acting as the foundation to develop an extensive data strategy, assess operational preparedness, or determine a modelling approach, PwC’s Data Input Catalog is the core to Pillar Two readiness.

Other global tax measures

Public consultation on the following measures has recently concluded:

new interest limitation rules that will replace the existing thin capitalisation safe harbour, worldwide gearing and arm’s length debt tests. These new rules will apply for income years commencing on or after 1 July 2023
denial of income tax deduction for payments made by a significant global entity to a related entity with respect to intangible assets connected with low corporate tax jurisdictions. The new rules will apply to in-scope payments made or credited, or liabilities incurred on or after 1 July 2023
a new requirement for Australian public companies to publicly disclose information about their subsidiaries including tax residency, ownership breakdown and entity type. The new measures will apply to financial years commencing on or after 1 July 2023, and
a new requirement for certain large multinationals (known as Country by Country (CbC) reporting parent entities) to publicly disclose the information in their CbC reports broken down by jurisdiction, as well as publicly disclose other tax and financial information. Public CbC reporting would be required for the 2023-24 and later income years.

These measures are yet to be introduced into Parliament.

For more information on these measures and to keep up to date with future changes, please refer to our Doing business in Australia website.