In brief
Australia’s Pillar Two primary legislation has completed its passage through Federal Parliament. With the release of the Rules that support the primary legislation expected to be imminent, it is likely that the Global and Domestic Minimum Tax will be ‘substantively enacted’ just prior to the end of their first full year of operation.
For in-scope Multinational Enterprise (MNE) groups, there is no time to lose to prepare for the financial, tax, governance and compliance implications of this significant change. Most immediately, in-scope groups will need to consider the minimum level of work required to evidence the Pillar Two position adopted in their full or half-year financial accounts.
In detail
The Australian Pillar Two legislative regime
On 27 November 2024, the primary legislation comprising of the following bills completed their passage through both Houses of the Australian Federal Parliament:
- Taxation (Multinational – Global and Domestic Minimum Tax) Imposition Bill 2024 (the Imposition Bill);
- Taxation (Multinational – Global and Domestic Minimum Tax) Bill 2024 (the Assessment Bill); and
- Treasury Laws Amendment (Multinational – Global and Domestic Minimum Tax) (Consequential) Bill 2024 (the Consequential Bill).
These three Bills form part of a set of legislation required to implement a global and domestic minimum tax in Australia.
The Imposition Bill imposes top-up tax, namely Australian Domestic Minimum Tax (DMT) and Australian Income Inclusion Rule (IIR) tax with effect for income years commencing on or after 1 January 2024, and Australian Undertaxed Profits Rule (UTPR) tax with effect for income years commencing on or after 1 January 2025. The Assessment Bill implements the framework for imposition of top-up tax for the IIR, UTPR and the DMT consistent with the OECD’s Pillar Two Global Anti-Base Erosion (GloBE) Rules. The Consequential Bill contains consequential and miscellaneous provisions necessary for the administration of top-up tax, consistent with the existing administrative framework under Australian tax law and the GloBE Rules.
Whist the Assessment Bill sets out a framework for entities that are liable to top-up tax, the substantive computation of top-up tax is to be determined through the application of yet to be finalised subordinate legislation in the form of a legislative instrument (the Rules). This approach should mean that any future administrative guidance released by the OECD on the application and interpretation of the rules can be readily incorporated into the Australian regime in a timely and efficient manner.
The primary legislation now awaits Royal Assent. Once Royal Assent has been granted, the subordinate legislation can then be registered as a legislative instrument. As the Assessment Bill relies on the application of the Rules for its proper application, the Australian Pillar Two regime is expected to be ‘substantively enacted’ (or ‘enacted’, where relevant) for financial reporting purposes only once these steps have taken place.
This represents a significant milestone in Australia’s introduction of the OECD Pillar Two regime, as impacted tax balances in the financial statements are required to be adjusted for a change in law that is substantively enacted (or ‘enacted’ for US GAAP) at the balance sheet date.
What does this mean for the financial reporting obligations of in-scope MNE groups?
For groups reporting under International Financial Reporting Standards (IFRS) (including Australian Accounting Standards), the International Accounting Standards Board (IASB) has issued a narrow scope amendment to IAS 12 ‘Income Taxes’ that provides temporary relief from accounting for deferred taxes that arise from the implementation of Pillar Two, while also introducing targeted disclosure requirements.
For annual accounting periods in which the Pillar Two legislation is enacted or substantively enacted, disclosure is required of:
- Current tax expense related to Pillar Two income taxes (shown separately from other current taxes); and
- The fact that the entity has applied the exemption to recognising and disclosing information about deferred tax in relation to Pillar Two.
Further details for groups reporting under IFRS can be found in this PwC Global Viewpoint publication.
For US GAAP reporters, the US Financial Accounting Standard Board (FASB) has confirmed that Pillar Two tax is considered an alternative minimum tax, which means that (in line with IFRS) there is no requirement to account for deferred taxes for the estimated future effects of Pillar Two taxes. Further details for groups reporting under US GAAP can be found in this PwC US Frequently Asked Questions publication.
This means that, where the rules have been either substantively enacted or enacted (as relevant) prior to 31 December 2024, in-scope MNE groups will need to have undertaken an assessment of the application of the rules to determine what disclosures will need to be made in either their full financial year reporting (in the case of 31 December fiscal year end MNE groups) or interim reporting (in the case of 30 June fiscal year end MNE groups) in accordance with the applicable accounting standards. This does not leave much time left to take action on this.
What level of assessment is required?
Regardless of whether an entity is a part of an outbound or inbound MNE group that is within the scope of the rules, it is anticipated that there will be a minimum level of work required to be undertaken to evidence the Pillar Two position adopted in the financial accounts.
Please refer to our Tax Alert on the Implementation of Pillar Two in Australia for a detailed overview of the actions that in-scope MNE groups should be completing as part of the implementation of Pillar Two in Australia.
Many Australian groups are seeking to rely on the application of the Transitional CbC Report Safe Harbour, which is a temporary concession applying simplified calculations that is available for the first three years of the Australian Pillar Two regime coming into effect. This is because satisfying the Transitional CbC Report Safe Harbour for a jurisdiction means that the jurisdictional Top-up Tax is deemed to be nil, no detailed Pillar Two calculations would be required for the jurisdiction under the full IIR or DMT, and compliance obligations are significantly reduced.
However, for MNE groups that are seeking to rely on the Transitional CbC Report Safe Harbour, it is critical that there is a process in place that can be evidenced and relied on for financial statement reporting purposes to:
undertake Transitional CbC Report Safe Harbour calculations to assess whether one of the three prescribed tests are satisfied (using contemporaneous data); and
validate that the methodology employed in preparing the CbC Report is such that the group can reasonably expect their CbC Report will be qualifying for Pillar Two purposes.
The assessment of whether an MNE group’s CbC Report will be a “qualified” CbC Report is not straight forward and should not be taken for granted. A number of complicating factors can arise in preparing the relevant CbC Report data each of which will need to be individually worked through to ensure that the report will be qualifying. Some of these challenges include ensuring that:
the impact of historical purchase price accounting adjustments is excluded from the results (where those adjustments have not been consistently pushed down to the entity reporting package level)
the CbC Report does not include any adjustments that were not reflected in either the consolidated financial statements or entity statutory accounts (as relevant)
jurisdictional results reflect an aggregation, and not a consolidation, of financial data
entities are appropriately allocated to the correct jurisdiction and stateless entities are excluded from the calculation
top-side adjustments are accurately allocated to the correct entity and jurisdiction
Pillar Two hybrid mismatches are adjusted out of the results;
and many more.
Addressing these factors may mean that changes to the historical approach to preparing the CbC Report are required if the group is intending to rely on the safe harbour. Assessing this position will also be relevant in evidencing the position adopted for the preparation of the financial accounts.
An MNE group which does not qualify for the Transitional CbC Report Safe Harbour in respect of one or more tested jurisdictions for a fiscal year cannot rely on the safe harbour in those tested jurisdictions in later years, even where they would otherwise qualify. When assessing this position, MNE groups should also consider the impact of adjustments which are addressed under an application of the full IIR or DMT calculations, but may otherwise prevent the MNE group from qualifying for the Transitional CbC Report Safe Harbour in respect of one or more tested jurisdictions (e.g. the impact on Income Tax Expense arising as a result of the utilisation of carry forward tax losses for which a deferred tax asset was not previously recognised).
Where a tested jurisdiction fails the Transitional CbC Report Safe Harbour, or the CbC Report does not satisfy the requirements to be qualifying, detailed calculations would need to be undertaken under the full IIR or DMT rules (as applicable). These detailed calculations are complex and involve capturing a significant amount of data from a variety of sources. In these circumstances, it would be critical to have a process established to undertake these detailed calculations to a sufficient degree to support the relevant financial statement disclosures.
Further details on preparing for the implementation of Pillar Two can be found on PwC's Pillar Two Readiness site.
The takeaway
In anticipation of the Australian Pillar Two regime becoming either substantively enacted or enacted prior to 31 December 2024, in-scope MNE groups should be assessing the application of the rules and preparing the required calculations and documentation needed to evidence their Pillar Two position and related financial reporting disclosures. Whilst the extent and nature of the work required will vary depending on the Pillar Two profile of an in-scope MNE group, a minimum level of work will need to be undertaken to support the group’s Pillar Two position. An immediate area of focus will generally be whether the Transitional CbC Report Safe Harbour is available.
Contact us
If you would like assistance, please reach out to our team or your PwC adviser.
Chris Stewart
Angela Danieletto
Helen Fazzino
Jonathan Malone
Michael Bona
Hang Vo
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