Introductory Info

Date of introduction: 2024-07-04

House introduced in: House of Representatives

Portfolio: Treasury

Commencement: Taxation (Multinational—Global and Domestic Minimum Tax) Imposition Bill 2024 (Imposition Bill), Taxation (Multinational—Global and Domestic Minimum Tax) Bill 2024 (Assessment Bill) and  Treasury Laws Amendment (Multinational—Global and Domestic Minimum Tax) (Consequential) Bill 2024 (Consequential Bill)  will commence on the day(s) they receive Royal Assent, and will apply to fiscal years commencing retrospectively on or after 1 January 2024. If the Assessment Bill does not commence, the provisions of the Imposition and Consequential Bills do not commence.

The commencement dates for the 3 new domestic taxes are:
-   The Australian income inclusion rule (IIR) tax and Australian domestic minimum top-up (DMT) tax apply to fiscal years starting from 1 January 2024; and
-   The Australian undertaxed profits rule (UTPR) tax applies to fiscal year starting from 1 January 2025.

This is a preliminary Bills Digest produced to assist early consideration of the Bill. It provides some background and links to relevant resources. It will be replaced with a more comprehensive Bills Digest in due course.

Purpose of the Bills

The purpose of the Taxation (Multinational—Global and Domestic Minimum Tax) Imposition Bill 2024 (Imposition Bill), Taxation (Multinational—Global and Domestic Minimum Tax) Bill 2024 (Assessment Bill) and Treasury Laws Amendment (Multinational—Global and Domestic Minimum Tax) (Consequential) Bill 2024 (Consequential Bill) is to address the tax challenges arising from digitalisation of the global economy. To do so, the Bills establish a 15% global minimum tax and domestic minimum tax for all multinational enterprise (MNE) groups with an annual global revenue of at least EUR 750 million (approximately A$1.2 billion) effective from 1 January 2024.

Committee consideration

Senate Economics Legislation Committee

The Bills have been referred by the Senate Selection of Bills Committee[1] to the Senate Economics Legislation Committee for inquiry and report by 14/8/2024.[2] At the time of writing this Digest, 8 submissions had been published online.

Senate Standing Committee for the Scrutiny of Bills

At the time of writing this Digest, the Senate Standing Committee for the Scrutiny of Bills had not considered the Bills.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bills’ compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[3]

Parliamentary Joint Committee on Human Rights

At the time of writing this Digest, the Parliamentary Joint Committee on Human Rights (p. 3) had considered and made no comments on the Bills.

Background

The Two Pillars Solution

On 8 October 2021, the OECD/G20 Implementation Plan as agreed by 136 members of the Inclusive Framework (including Australia) envisaged a Two Pillars Solution to base erosion and profit shifting, with each of the Two Pillars to be implemented separately through a combination of multilateral conventions or instruments and domestic legislation. The Bills discussed in this preliminary Digest relate to part of Pillar Two.

According to this historic Implementation Plan, Pillar One, originally due to come into effect in 2023 once a critical mass of countries had ratified it, is still being negotiated. There is not yet an agreed revised timeline.[4]

Pillar Two was originally scheduled to become effective from 2023, but in its report to G20 finance ministers and central bank governors on 11 July 2022, the OECD acknowledged that the implementation of Pillar Two would be delayed, with most jurisdictions planning for an entry into force of Pillar Two in 2024.

Pillar Two consists of two sets of rules:

• the Subject to Tax Rule (STTR), which is not yet finalised by the OECD, and is not covered by the Bills discussed here. The STTR rule is intended to overcome problems for developing countries dealing with tax treaties. The STTR is separate to, and takes priority over, the GloBE Rules.
• the GloBE Rules – which ensures a minimum effective tax rate (ETR) of 15% for  multinationals with global revenue of at least EUR750 million, or approximately A$1.2 billion, per annum. The Bills discussed here relate to the GloBE Rules.

Pillar Two is explained in the Explanatory Memorandum to the Bills and Treasury’s  ‘Global agreement on corporate taxation: addressing the tax challenges arising from the digitalisation of the economy’ (2022 Consultation Paper), the OECD Global anti-Base Erosion (GloBE) Model Rules (GloBE Rules) Rules and the many OECD guidance materials (which are further explained in the section below.) It is highly complex as it draws on knowledge from specialised professions including international taxation, accounting (especially deferred tax accounting knowledge),[5] IT, business development with mergers and acquisitions, forecasting and business analysis.

One of the aims of the Two-Pillar Solution is to address the ‘race to the bottom’ problem for global corporate income tax rates (p. 11) due to the digitalisation of a global economy. On 11 July 2024, the OECD published statistics which appear to show the new global minimum tax working as intended despite not being fully implemented by all participating Inclusive Framework members:  

Statutory corporate tax rates are stabilising worldwide after a lengthy period of falling rates, according to new OECD data released today…

The 2024 edition of OECD Corporate Tax Statistics shows that average statutory corporate income tax (CIT) rates have remained steady at 21.1% over the past three years. This follows a two-decade period that saw average statutory CIT rates decline from 28% in 2000 to 21.1% in 2021.

Anticipation of the new Global Minimum Tax agreed by more than 140 members of the Inclusive Framework on Base Erosion and Profit Shifting, may have contributed to the recent stabilisation, according to the report. More than 35 jurisdictions are currently implementing, or plan to implement, the 15% minimum corporate effective tax rate with effect from 2024, reducing competitive pressures on statutory CIT rates.  

Australia’s local version of the GloBE Rules

In his Second Reading Speech (p. 9), Dr Andrew Leigh (Assistant Minister for Competition, Charities and Treasury, Assistant Minister for Employment) said:

The global minimum tax will enable Australia to apply top-up tax on a resident multinational parent or subsidiary company where the group's income is taxed below 15 per cent overseas.

The domestic minimum tax will enable Australia to apply top-up tax for any low-taxed domestic income before a foreign country would otherwise take that tax under the new rules. (emphasis added)

The Imposition Bill’s 3 new taxes together seek to remove the incentive for countries to shift their profits between jurisdictions, and to introduce an incentive for countries to apply a minimum tax rate to the profit related to their jurisdiction, as outlined in Table 1.

Table 1:  How the elements fit together and order of application

What it is	Policy intent
Australian domestic minimum tax (priority rule)	For MNE Groups that are in scope, Australia has the primary right to collect a top-up tax to reach a minimum domestic effective tax rate of 15% on the excess profit of Constituent Entities.[6]
Australian income inclusion rule tax	If the source jurisdiction’s (say, Singapore’s) effective tax rate of an MNE Group is less than 15%, and if the source jurisdiction does not have a domestic minimum top up tax in place, then the jurisdiction where the ultimate parent entity (UPE) is located can apply the IIR to collect top-up tax related to the source jurisdiction. If the UPE is located in a jurisdiction that has not implemented the IIR, then the top-up tax will be levied on the next entity in the ownership chain hierarchy that is located in a jurisdiction with an IIR.
Australian undertaxed profits rule tax	Where a jurisdiction does not exercise its right to impose IIR top-up tax, the tax is instead collected by all jurisdictions (where the MNE Group operates) that have implemented a UTPR top-up tax regime. Implementing jurisdictions (such as Australia) can collect the top-up tax by applying the Australian UTPR top-up tax.

Source: Parliamentary Library, based on the Treasury’s Explanatory Memorandum, Treasury’s 2022 Consultation Paper and OECD Global Minimum Tax.

The 3 new taxes are meant to be ‘consistent with’ and ‘functionally equivalent’ to the GloBE Rules, as required by the OECD to achieve ‘qualified status’.

The OECD further explains the importance of a ‘common approach’ and the qualified status in its June 2024 Questions and Answers on the Qualified Status under the Global Minimum Tax (p.1):

Once implemented into domestic law of each jurisdiction the rules operate together to ensure that MNE Groups are subject to a minimum level of tax on their excess profits in every jurisdiction where they operate.

The October 2021 statement issued by members of the IF states that the Global Minimum Tax has the status of a common approach. This means that jurisdictions are not required to adopt the rules, but, if they choose to do so, they have agreed that they will implement and administer the rules in a way that is consistent with the outcomes provided for under the GloBE Model Rules and Commentary including any subsequent Administrative Guidance agreed by the IF.

In addition, the common approach means that IF members accept the application of the rules applied by other IF members, including agreement as to rule order and the application of any agreed safe harbours.

…

The Global Minimum Tax results from the combined effect of three types of domestic charging provisions that apply in accordance with an agreed rule order:

➢ the Qualified Domestic Minimum Top-up Tax (QDMTT) which applies first, at the level of source jurisdiction, in respect of any low-taxed profits arising in that jurisdiction,

➢ the Qualified Income Inclusion Rule (IIR) which applies in respect of remaining low-taxed profits. The IIR is applied first at the level of the Ultimate Parent Entity (UPE) of the MNE Group and then shifts to the next Intermediate Parent Entity (IPE) in the ownership chain in line with a top-down approach,

➢ the backstop rule (the UTPR) which applies at the level of any Constituent Entity within the MNE Group, to the extent low-taxed profits are not subject to a Qualified IIR.

In particular, the OECD points out the need for a domestic minimum tax to be consistent with the global minimum tax when it explains the requirements for a ‘qualified domestic minimum top-up tax’ (QDMTT) at different times. Australian Domestic Top-up Tax (DMTT) will eventually recognised as a QDMTT provided that our DMTT will become ‘qualified’.

The concept of QDMTT was first introduced in the GloBE Rules on 20 December 2021. In February 2023, the OECD defined and specified detailed requirements of a QDMTT in Tax Challenges Arising from the Digitalisation of the Economy – Administrative Guidance on the Global Anti-Base Erosion Model Rules (Pillar Two) (p. 98):  

The definition of “Qualified Domestic Minimum Top-up Tax” (QDMTT) is set out in Article 10.1 of the GloBE Rules. This definition distinguishes QDMTT from other minimum taxes in that it requires that the minimum tax is implemented and administered in a way that is consistent with the outcomes provided for under the GloBE Rules and Commentary such that it increases the MNE Group’s domestic liability on domestic Excess Profits to the Minimum Rate. The definition also prohibits the provision of benefits to the MNE Group related to the GloBE Rules. Specifically, the definition of QDMTT in Article 10.1 provides:

Qualified Domestic Minimum Top-up Tax means a minimum tax that is included in the domestic law of a jurisdiction and that:

(a) Determines the Excess Profits of the Constituent Entities located in the jurisdiction (domestic Excess Profits) in a manner that is equivalent to the GloBE Rules;

(b) Operates to increase the domestic tax liability with respect to domestic Excess Profits to the Minimum Rate for the jurisdiction and Constituent Entities for a Fiscal Year; and

(c) Is implemented and administered in a way that is consistent with the outcomes provided for under the GloBE Rules and the Commentary, provided that such jurisdiction does not provide any benefits that are related to such rules. (emphasis added)

The OECD further explains the meaning of ‘functionally equivalent to the GloBE Rules’(p.100):  

A domestic minimum tax must be functionally equivalent to the GloBE Rules to be treated as a Qualified Domestic Minimum Top-up Tax. To be considered functionally equivalent, a domestic minimum tax must be implemented and administered so that it reliably produces outcomes that are consistent with the outcomes for the jurisdiction that are produced under the GloBE Rules and Commentary. Specifically, in order to be considered functionally equivalent to the GloBE Rules, a minimum tax must be structured so that it is in line with the architecture of the GloBE Rules and does not systematically result in an incremental top-up tax for the jurisdiction that is less than what would have been determined under the GloBE Rules.

For reasons above, the Imposition Bill imposes 3 new Australian taxes  (namely, the Australian IIR tax, Australian DMT tax and Australian UTPR tax) which are meant to be ‘consistent with’ and ‘functionally equivalent’ to the GloBE Rules. According to Dr Leigh, the Assessment Bill implements the core rules of the global and domestic minimum taxes. It establishes a new tax framework and scope for the imposition of top-up taxes under the two minimum taxes. The Assessment Bill is meant to be consistent with the GloBE Rules.

To provide relief from double taxation (subject to integrity safeguards):

• a foreign income tax offset credit will be available to MNE taxpayers for any top-up tax paid under a foreign jurisdiction’s domestic minimum tax
• the controlled foreign company (CFC) rules will be amended to take into account any top-up tax paid under a foreign jurisdiction’s domestic minimum tax
• franking credits will be available to MNE taxpayers who pay top-up tax under Australia’s domestic minimum tax, representing a corporate tax paid on domestic profits.

An amendment has also been included so that Australia’s bilateral tax treaties will be overridden in the event of any inconsistency between them and the application of the global minimum tax. 

In June 2024, the OECD has alerted further plans for the peer review process which will ultimately determine the ‘qualified’ status of a jurisdiction’s domestic IIR, UTPR and DMTT and eligibility for the Qualified Domestic Minimum Top-up Tax (QDMTT) Safe Harbor. Essentially the OECD explains that domestic minimum tax needs to be ‘qualified’ using a peer review process. This may introduce another level of practical challenges.

Subordinate legislation

It is notable that the Bills and the Explanatory Memorandum have not explained some of the key aspects of the GloBE Rules (for example, computation of GloBE Income and effective tax rate calculations etc). These key aspects of the GloBE Rules are contained in the draft subordinate legislation which was circulated for public consultation ending on 16 May 2024.

However, it is unlikely that the Government will introduce the draft subordinate legislation to the Parliament as in his Second Reading Speech to the Assessment Bill, Dr Andrew Leigh (Assistant Minister for Competition, Charities and Treasury, Assistant Minister for Employment) said

The government intends to finalise the subordinate legislation in the form of ministerial rules, which is necessary for the bill to operate effectively. Such rules will build upon the framework established by this bill, setting out various computational and administrative provisions necessary to give effect to the global and domestic minimum taxes in Australia.

The authority to make such ministerial rules is provided for in this bill. The bill further allows for any ministerial rules created after this bill is passed to operate retrospectively, being necessary to align with the bill's retrospective application from 1 January 2024.

The Explanatory Memorandum (p. 14, paragraph 2.4) also mentions:

It is intended that the substantive computation of top-up tax, consistent with the GloBE Rules, is to be determined via Rules made under the Minister’s rule-making power. This approach ensures that future Agreed Administrative Guidance released by the OECD can be more readily incorporated into the Australian regime in a timely and efficient manner, while retaining an appropriate level of parliamentary oversight. This Bill contains empowering provisions to ensure such Rules can sufficiently provide the requirements for computing an ETR. Provisions consistent with the ancillary Chapters 6 and 7 of the GloBE Rules are intended to be contained in the Rules to support the ETR computations for special entities. The safe harbours and transitional provisions from Chapters 8 and 9 of the GloBE Rules are intended to be contained in the Rules.

According to Pillar Two Implementation Timetable that is outlined in the Explanatory Memorandum (p. 147), the Government expects that by 2024, it will enact the legislation for global and domestic minimum tax; as well as those complex and important elements within the GloBE Rules (such as the computation of top-up tax and effective tax rates) that are mentioned in the subordinate draft legislation.

How does Pillar Two global minimum tax work (in theory)?

As explained in the Treasury’s 2022 Consultation Paper (p.10), Pillar Two consists of two sets of rules:

• the Subject to Tax Rule (STTR) - the STTR is separate to, and takes priority over, the GloBE Rules, and
• the GloBE Rules – which ensures a minimum effective tax rate (ETR) of 15% for  multinationals with global revenue of at least EUR750 million, or approximately A$1.2 billion,  per annum.

Qualified Domestic Minimum Top-up Tax (QDMTT)

It was a surprise to many when the concept of QDMTT was first introduced in the GloBE Rules on 20 December 2021. Prior to that, under the influence of the Tax Challenges Arising from Digitalisation – Report on Pillar One Blueprint (OECD Two Pillar Blueprint)  which was published in October 2020, many thought that the GloBE Rules would only consist of two interlocking rules (the Income Inclusion Rule and the Undertaxed Payments Rule).

The QDMTT is a recognition in the GloBE Rules that source countries have the primary right to collect top-up taxes. A payment of top-up tax under a QDMTT will be treated as fully creditable against another jurisdiction’s Qualified IIR or Qualified UTPR, as relevant. After the QDMTT was introduced into the GloBE Rules, the reaction was for many jurisdictions (including Australia) to introduce their domestic minimum tax where there is under taxation.

Income Inclusion Rules (IIR) Tax and Undertaxed Payment Rule (UTPR)[7]

In addition to the QDMTT, the GloBE Rules consist of two other interlocking rules:

• the Income Inclusion Rule (IIR), and
• the Undertaxed Payments Rule (UTPR).

The Income Inclusion Rules (IIR) taxes the ultimate parent entity if that country or jurisdiction introduces the GloBE Rules, or intermediate interposed holding parent entity where they introduce the GloBE Rules, on any undertaxed profits of subsidiaries in low tax jurisdictions.

The top up tax on the parent MNE is based on jurisdictional effective tax rate (ETR) calculation for its Constituent Entity (ie its subsidiaries and permanent establishment (PE)).

The backstop is the UTPR. Ideally there won’t be a lot of use of this rule in Australia. If there is undertaxed profit in the Group,  and that jurisdiction does not have a domestic minimum tax to increase the ETR to 15%, and that undertaxed profit is also not subject to tax in the parent’s IIR, then other entities (subs) in the group globally where they implement a GloBE in their jurisdictions, will be allocated the undertaxed profit, so the ‘leakage’ of the top up taxes will be allocated across different jurisdictions. 

The expectation is that UTPR has limited application if all countries within-scope groups have IIRs, the IIR should have priority.

Agreed rule order

In Figure 1 below, the OECD explains the agreed rule order of the QDMTT, IIR and UTPR:

A liability for top-up tax for a member of an in-scope MNE Group arises under three types of provisions: the QDMTT, the IIR and the UTPR. The low-taxed jurisdiction has the primary right to collect top-up tax under the QDMTT (1). If the low-taxed jurisdiction does not have a QDMTT then the jurisdiction where the UPE is located can apply the IIR in respect of the income of the low-taxed Constituent Entity (2). If the UPE is located in a jurisdiction that has not implemented a Qualified IIR, then the top-up tax will be levied on the next entity in the ownership chain that is located in a jurisdiction with an IIR following a top-down approach (i.e. intermediate parent entity (IPE)) (3). Where a Qualified IIR does not apply, the top-up tax is collected by the jurisdictions that have implemented a UTPR (4). The amount of tax to be collected under the UTPR in each given jurisdiction is allocated by reference to a substance-based allocation key.

Figure 1: The Agreed Rule Order for GloBE Rules

Source: Global Minimum Tax | OECD

How is the effective tax rate calculated

Figure 2 below shows a highly simplified version of how the effective tax rate (ETR) is calculated on a blended jurisdictional basis. As the devils are in the details, the determinations of ‘qualifying taxes’ in step 1 and ‘GloBE income’ in step 2 are highly complex and some rules are yet to be finalised.

Figure 2: Six steps to calculate ETR under the GloBE Rules

Source: KPMG, Global minimum top-up tax talkbook - final (kpmg.com), p. 6.

Please see below an excerpt from the KPMG (p. 6) which explains the six steps involved in working out the top-up tax amount.

Please note that ETR is calculated on a blended jurisdiction basis - please see Figure 3 below which is a simple example to show how jurisdictional blended ETR is calculated, and which jurisdiction (X, Y or Z) ended up paying the top up tax.

Figure 3:  ETR is calculated on a blended jurisdictional basis

Source: KPMG, Global minimum top-up tax talkbook - final (kpmg.com), p. 5.

Calculation of the top-up tax

Figure 4 below explains how a jurisdictional top-up tax is calculated at a high level.

Figure 4: Calculation of the jurisdictional top-up tax

Source: OECD, Global Minimum Tax.

Referring to Figure 4 above, the  OECD explains the computation of the ETR and calculation of the top-up tax:

The GloBE Income or Loss and Covered Taxes of each Constituent Entity located in the same jurisdiction are added together to compute the jurisdictional effective tax rate (ETR). The top-up tax percentage due is the difference between the 15% minimum rate and the ETR in the jurisdiction. That top-up tax percentage is then applied to the GloBE Income or Loss in the jurisdiction, after deducting a substance-based income exclusion. The substance-based income exclusion is calculated based on a percentage of the tangible assets and payroll expenses.

Transitional Country by Country Reporting Safe Harbour

At the time of writing this Digest, Schedule 4 (Country by Country Reporting) to the  Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024 is about to be debated in the Senate. Schedule 4 CbC Reports may be utilised under the Transitional Country by Country Reporting (CbCR) Safe Harbour rules for the GloBE Rules, but subject to further conditions imposed by the CbCR Safe Harbour rules.

A safe harbour is a legal provision to reduce or eliminate legal or regulatory liability in certain situations as long as certain conditions are met. In terms of Pillar Two safe harbour rules, the Inclusive Framework was called on to develop a set of safe harbours (p. 4), which would relieve MNEs from performing full GloBE calculations for low-risk jurisdictions during this initial period. The safe harbour rules are much welcomed by impacted taxpayers as they may offer temporary (or even permanent) relief to the heavy compliance burden associated with the very complex Pillar Two GloBE Rules.[8] However, the safe harbour rules are complex themselves.

One of the safe harbours that the OECD first mentioned is the Transitional Country by Country Reporting (CbCR) Safe Harbour in its Safe harbours and penalty relief  document published in December 2022.

The Transitional CbCR Safe Harbour (p. 7) operates through the use of simplified jurisdictional revenue and income information contained in an MNE’s Qualified CbC Report, and jurisdictional tax information contained in an MNE’s Qualified Financial Statements. It applies to jurisdictions in which Constituent Entities of the MNE are located (“Tested Jurisdiction”).

However, there are many finer details that add to the complexity of this transitional safe harbour rules. For example, the Transitional CbCR Safe Harbour applies only where the MNE Group prepares its CbC Report using Qualified Financial Statements (p. 7) - the safe harbour does not apply where the CbC Report as a whole does not provide a reliable indication of the income of the MNE Group. The safe harbour is limited to a transitional period (p. 7) that applies to Fiscal Years beginning on or before 31/12/2026 but not including a Fiscal Year that ends after 30/6/2028. If an MNE Group has not applied the Transitional CbCR Safe Harbour with respect to a jurisdiction in the first year in which the MNE Group is subject to the GloBE Rules, the MNE Group cannot qualify for that safe harbour for that jurisdiction in a subsequent year (p. 7). To access the safe harbour, the MNE Group would need to comply with the filing requirements in the GloBE Information Return that are specific to the Transitional CbCR Safe Harbour (p. 7).

For further information on CbCR, please read:

Elo Guo-Hawkins, Jaan Murphy and Matthew Collett,  ‘Treasury Laws Amendment (Responsible Buy Now Pay Later and Other Measures) Bill 2024’, Bills Digest, 2024—25, (Canberra: Parliamentary Library, 2024), 28—35.

Phil Beswick, Alia Lum, Tim Keeling and Jenny Wong, KPMG, ‘Australian public CbC reporting - revised draft legislation for MNEs sets baseline compliance but reporting timeframe a challenge’, Weekly Tax Bulletin, Issu 007 (23 February 2024).  

Pillar Two state of play

Members of the OECD/G20 Inclusive Framework on BEPS as at 28 May 2024

At its inaugural meeting in Kyoto, Japan in June 2016 there were 82 members of the OECD/G20 Inclusive Framework on BEPS. Since then, the membership of the Inclusive Framework has grown to 147 countries and jurisdictions, including 14 observer organisations. The ongoing work of the OECD/G20 Inclusive Framework is led by a 24-country Steering Group.

Global status of the implementation of the GloBE Rules taxes (IIR and UPTR) and domestic minimum top-up taxes

The KPMG’s Pillar Two State of Play Digital Gateway provides a real-time reporting on the status of global adoptions of the

• global minimum top-up taxes which are established under the GloBE Rules – the Income Inclusive Rules (IIR) tax and Undertaxed Profits Rules (UTPR) tax; and
• the qualified domestic minimum top-up taxes (QDMTT).

At the time of writing this Digest, the KPMG Digital Gateway reported the status of 74 jurisdictions. Twenty-nine (29) jurisdictions (including the European Union) have already enacted the IIR tax with a commencement date of 1 January 2024.[9]  Most of these 29 jurisdictions

• have either enacted or are in the process of implementing their global UTPR taxes with an commencement date of 1 January 2025,[10] and
• enacted their domestic minimum top-up taxes with commencement date of 1 January 2025.[11]

Another 23 jurisdictions (including Australia) have either formally announced or are in the process of enacting their global IIR taxes, with Australia, Cyprus and Spain commencing their IIR taxes in 2024, some (such as HK and Singapore) commencing in 2025, some (such as Estonia, Malta and Latvia) deferring their commencement date to 2030, and the remaining jurisdictions (such as UAE, Switzerland and Isle of Man) having ‘uncertain’ commencement date. Most of these 23 jurisdictions are in the process of implementing or have formally announced to implement the UTPR taxes with various commencement dates.[12]  Most of these 23 jurisdictions have either formally announced to in the process of enacting their domestic minimum top-up taxes with various commencement dates.[13]

The remaining 22 jurisdictions (notably including the US, China, Bermuda, Macau, India, Indonesia and Taiwan) have taken no actions so far in implementing their global IIR and UTPR taxes. In terms of domestic top-up taxes, 9 jurisdictions including Barbados, Zimbabwe, Egypt and Qatar) have either enacted or are in the process of implementing their DMTT. However, 13 jurisdictions, including notably again, the US, China, India, Taiwan and Indonesia, have taken no actions so far to implement their DMTTs.  

Inclusive Framework development and hurdles

In 2013, OECD and G20 countries, working together on an equal footing, adopted a the 15 Actions BEPS package (also known as the BEPS 1.0 project)[14] to address base erosion and profit shifting (BEPS). Beyond securing revenues by realigning taxation with economic activities and value creation, the OECD/G20 BEPS Project aims to create a single set of consensus-based international tax rules to address BEPS, and hence to protect tax bases while offering increased certainty and predictability to taxpayers.

In 2016, the OECD and G20 established an Inclusive Framework on BEPS to allow interested countries and jurisdictions to work with OECD and G20 members to develop standards on BEPS related issues and reviewing and monitoring the implementation of the whole BEPS Package. At this stage, over 100 countries and jurisdictions had joined the Inclusive Framework.

The US Influence

The OECD global tax deal has long suffered implementation delays. Amongst many reasons for the delay were COVID and the reluctance from the US. As the Two Pillars originally targeted the US tech giant monopolists such as Google, Apple, Amazon etc, the US (including both the Obama and Trump administrations) resisted the Two Pillar movements.[15] Instead the Trump administration promoted its own global intangible low-taxed income (GILTI) and Base Erosion and Anti-Abuse Tax (BEAT) (both implemented in 2017) as solutions to base erosion.[16] Meanwhile, the EU led Digital Services Tax spread to other jurisdictions around 2018 and 2019. The US threatened retaliatory trade wars against those countries that implemented the Digital Services Tax.

On 3 December 2019, US Treasury Secretary Mnuchin wrote to the OECD Secretary-General suggesting that the Pillar 1 proposal be a safe-harbour regime, which slowed its progress.[17] The Inclusive Framework through its January 2020 Statement reaffirmed its commitment to reach a multilateral agreement for the Two Pillars by the end of 2020, and agreed upon an outline of the architecture of a Unified Approach on Pillar One. However, in mid-June 2020, the US announced that it was withdrawing from the work on Pillar 1 because it was targeting US companies, though it still supported Pillar 2.[18]

The OECD continued its work on BEPS2.0 and released detailed blueprints for the Two Pillars for consultation in 2020.

After President Biden took over the office in January 2021, the new US Treasury Secretary Yellen and the Biden administration announced their support for the Two Pillars, dropping the previous US demand for Pillar 1 to operate on an opt-in safe harbour basis, removing the specific US tech giant focus from Pillar One by proposing a very high income threshold without reference to the nature of the MNE type of business (thus the luxury brands in Europe were also brought in scope).[19]

On 8 October 2021, the OECD announced that 136 jurisdictions had reached a final agreement on the Two Pillars Solution.  On 21 October 2021, the UK, France, Italy, Austria and Spain confirmed that they would transition from their existing DSTs to the new multilateral solutions and the US dropped its tariff threat. The Two Pillars had since progressed, especially Pillar Two. It remains to be seen whether the outcome of the November 2024 US election will impact the Two Pillars movement.  

The Two Pillars Solution originates from Action 1 of BEPS 1.0

Addressing the tax challenges raised by digitalisation has been a top priority of the OECD/G20 Inclusive Framework in BEPS since 2015 with the release of the BEPS Action 1 Report. At the request of the G20, the Inclusive Framework has continued to work on the issue, delivering an interim report in March 2018.

In 2019, members of the Inclusive Framework agreed to examine proposals in two pillars, which could form the basis for a consensus solution to the tax challenges arising from digitalisation.[20]

That same year, a programme of work to be conducted on Pillar One and Pillar Two was adopted and later endorsed by the G20.

OECD Pillar Two guidance materials

According to the ATO, OECD guidance materials are intended to promote a consistent and common interpretation of the GloBE Rules to provide certainty for MNE Groups and to facilitate coordinated outcomes under the rules.

Blueprint (2020)

In October 2020, the OECD released the Tax Challenges Arising from Digitalisation – Report on Pillar One Blueprint (the Blueprint). Although some important details might be missing as they were still subject to negotiations, and some other details have since been re-written or removed, the Blueprint is important as it first laid the foundation of the Two-Pillar Solution.

The Blueprint (p. 9) mentions the ‘common approach’ for the adoption of Pillar Two. The Blueprints also signalled for perhaps the first time that the Pillar Two work had started to move ahead of Pillar One.[21]

October 2021 Statement on a Two Pillar Solution – a political agreement reached by 136 member jurisdictions of the OECD/G20 Inclusive Framework

In October 2021, 136 jurisdictions joined a ground-breaking plan to update key elements of the international tax system weakened by a globalised and digitalised economy. The Global Anti-Base Erosion Rules (GloBE) are a key component of this plan and aim to ensure large multinational enterprise pay a minimum level of tax on the income arising in each of the jurisdictions where they operate. More specifically, the GloBE Rules provide for a co-ordinated system of taxation that imposes a top-up tax on profits arising in a jurisdiction whenever the effective tax rate, determined on a jurisdictional basis, is below the minimum rate.

GloBE Rules Rules (Dec 2021)- a surprise element: ‘QDMTT’!!

Between June and July 2021, three important meetings were held, including:

• G7 Finance Ministers meeting
• Inclusive Framework meeting
• G20 Finance Ministers meeting. 

The OECD released the GloBE Rules on 20 December 2021. This report delineates the scope and sets out the operative provisions and definitions of the GloBE Rules. These rules were intended to be implemented as part of a common approach and to be brought into domestic legislation as from 2022.

Commentary to the GloBE Rules

1. Commentary to the Global Anti-Base Erosion Model Rules (Pillar Two), First Edition (published on 14 March 2022)

This Commentary explains the intended outcomes under the GloBE Rules and clarifies the meaning of certain terms. It also illustrates the application of the rules to certain fact patterns.

Starting from the release of this Commentary in March 2022, the OECD and the Inclusive Framework members have been undertaking ongoing technical work on revising, amending or even re-writing the GloBE Model Rules until now. IF members have started implementing their domestic legislation since December 2022.  

2. Consolidated Commentary to the Global Anti-Base Erosion Model Rules (2023) (published on 25 April 2024)

This Consolidated Commentary incorporates Agreed Administrative Guidance that has been released by the Inclusive Framework since March 2022 up until December 2023. It provides tax administrations and taxpayers with guidance on the interpretation and application of the GloBE Rules in order to promote a consistent and common interpretation and application of those that will facilitate coordinated outcomes for both tax administrations and MNE Groups.

Agreed Administrative Guidance

1. First Agreed Administrative Guidance (2 February 2023)

The items of Administrative Guidance set out in this document address a wide range of issues that Inclusive Framework members have identified as the issues most in need of immediate clarification and simplification for stakeholders.  In particular, this document addresses issues related to the scope, the income and taxes calculation as well as issues related to insurance companies. It also provides guidance on the transition rules and the design of Qualified Domestic Minimum Top-up Taxes (QDMTT).

2. Second Agreed Administrative Guidance (17 July 2023)

This document sets out the second set of Administrative Guidance items released by the Inclusive Framework, following the first set of Administrative Guidance items that were published in February 2023. This second set includes guidance on currency conversion rules when performing GloBE calculations, on tax credits, and on the application of the Substance-based Income Exclusion (SBIE). It also includes further guidance on the design of Qualified Domestic Minimum Top-up Taxes (QDMTT) as well as two new safe harbours:

• A permanent safe harbour for jurisdictions that introduce a Qualified Domestic Minimum Top-up Tax (QDMTT), which will make compliance and administration easier for MNEs and tax administrations.
• A transitional safe harbour, which provides the UPE Jurisdiction with relief from the application of the UTPR for fiscal years commencing on or before the end of 2025.

3. Third Agreed Administrative Guidance (18 December 2023)

This document sets out the third set of Administrative Guidance items released by the Inclusive Framework, following the first and second sets of Administrative Guidance items that were published in February 2023 and July 2023 respectively. This third set of guidance supplements the Commentary to the Global Anti-Base Erosion Model Rules in order to clarify their application, including guidance on the application of the Transitional Country-by-Country Reporting Safe Harbour and a mechanism for allocating taxes arising in a Blended Controlled Foreign Corporation (CFC) Tax Regime when some of the jurisdictions the MNE operates in are eligible for the safe harbour.

4. Fourth Agreed Administrative Guidance (17 June 2024)

This document sets out the fourth set of Administrative Guidance items released by the Inclusive Framework, following the first, second and third sets of Administrative Guidance items that were published in February 2023, July 2023 and December 2023 respectively. This fourth set of guidance supplements the Commentary to the Global Anti-Base Erosion Model Rules in order to clarify their application, including guidance on application of the recapture rule applicable to deferred tax liabilities (DTL), cross-border allocation of current and deferred taxes, allocation of profits and taxes in certain structures involving Flow-through Entities, and the treatment of securitisation vehicles.

GloBE Information Return

Tax Challenges Arising from the Digitalisation of the Economy – GloBE Information Return (Pillar Two) (17 July 2023)

The GloBE Information Return (GIR) sets out a standardised information return to facilitate compliance with and administration of the GloBE Rules. It contains the information a tax administration needs to perform an appropriate risk assessment and to evaluate the correctness of a Constituent Entity’s Top-up Tax liability. This document has been developed following a public consultation that took place in March 2023. In response to feedback, the GIR incorporates transitional simplified reporting requirements that allow MNEs to report their GloBE calculations at a jurisdictional level. The GIR will be subject to coordinated filing and exchange mechanisms that allow MNEs to report their GloBE calculations on a single return, where the more detailed information is made available to implementing jurisdictions where a Top-up Tax liability may arise.

Safe harbours, penalty relief, illustrative examples

Safe harbours and penalty relief (20 December 2022)

Building on the input from a public consultation in April 2022, the Inclusive Framework has agreed on the design of a transitional safe harbour and a regulatory framework for the development of a potential permanent safe harbour as well as a common understanding for a transitional penalty relief regime.

Illustrative Examples (25 April 2024)

These examples illustrate the application of the Model GloBE Rules to certain fact patterns. Originally published on 14 March 2022, this document was revised on 25 April 2024 to include the illustrative examples that were developed as part of the various pieces of Administrative Guidance approved by the Inclusive Framework before the end of December 2023.

Pillar Two development in Australia

The Two Pillar Solution was agreed by Australia and 135 other member countries and jurisdictions under the OECD/G20 Inclusive Framework on BEPS (the ‘Inclusive Framework’) in October 2021. Australia’s strong support of the principles and causes behind the Two-Pillar Solution can be seen through the former Coalition Government’s long term commitment and implementation of the 15 Actions BEPS package[22] and the Labor Party’s election promise to support the Two-Pillar Solution in April 2022. As a member of the G20, Australia also helped develop the Inclusive Framework (p. 11).

2019 Australia chose the Two Pillars over Digital Service Tax

In October 2018, the former Government released a discussion paper, The digital economy and Australia’s corporate tax system, to consider whether Australia should also pursue interim options until a consensus-based solution is achieved. At that time, the discussion paper noted that only India, Hungary, Italy and Spain had implemented or announced interim digital tax measures ahead of any international solution. 44 submissions were received for this consultation, including 6 confidential submissions. 38 submissions are published and still available online.

On 3 March 2019, former Treasurer Mr Josh Frydenberg announced that Australia would opt out of an interim unilateral DST for the following reasons:

In response, stakeholders overwhelmingly supported Australia continuing to engage in the ongoing multilateral process led by the OECD and the G20. Thirty-eight submissions are now available on the Treasury website.

Many stakeholders raised significant concerns about the potential impact of an Australian interim measure across a wide range of Australian businesses and consumers, including discouraging innovation and competition, adversely affecting start-ups and low-margin businesses, and the potential for double taxation.

Given this feedback and recent international developments, the Government has decided to continue to focus our efforts on engaging in a multilateral process and not to proceed with an interim measure, such as a digital services tax, at this time.

2022 public consultation on Two Pillars

On 1 November 2022, the Albanese Government completed a public consultation on the Two-Pillar Solution and published 22 out of 25 submissions (there were 3 confidential submissions). Since then, the Government had made a couple of announcements to repeat their support for the Two-Pillar Solution.[23]

2023—24 Budget announcement for Pillar Two

In May 2023, the Government announced it would implement the key aspects of the Pillar Two Solution in Budget Measures: Budget Paper No.2: 2023–24 (p. 20). This involves the implementation of a 15% global and domestic minimum tax which would commence from 1 January 2024; and the undertaxed profits rules tax which commences from 1 January 2025.

March—April 2024 draft primary and subordinate legislation for Pillar Two

On 21 March 2024, the Government circulated draft legislation for public consultations which ended on 16 April for the primary legislation and 16 May 2024 for the subordinate legislation respectively.

The primary legislation includes the 3 draft Bills – the draft Imposition, Assessment and the Consequential Amendments Bills; and the draft Explanatory Memorandum. A separate Discussion Paper was also included in the package for stakeholders’ consultation on the interactions between the draft primary legislation and provisions in Australia’s existing income tax law, including:

• hybrid mismatch rules
• controlled foreign company (CFC) rules
• foreign income tax offsets (FITO).

The subordinate legislation was in the form of [OECD] Rules, comprising the key operative aspects of the GloBE Model Rules (for example, computation of GloBE Income, effective tax rate calculations and so on). According to the ATO, the ‘majority of the GloBE rules will be contained in subordinate legislation, to be made after enactment of the primary legislation.’

The draft subordinate legislation is unlikely to be introduced to the House of Representatives, as Dr Andrew Leigh (Assistant Minister for Competition, Charities and Treasury, Assistant Minister for Employment) confirmed that the Government intends to finalise the subordinate legislation in the form of ministerial rules in his Second Reading Speech to the Assessment Bill.

Please see Thomson Reuters’ summary of the draft legislation.

March—April 2024 consultation on interactions with Hybrid mismatch rules, foreign hybrids and foreign income tax offsets

During the March and April 2024 consultation, the Treasury also released a Consultation paper - Global and domestic minimum taxes: Interactions with other Australian tax laws. The Paper sought stakeholder feedback on how the global and domestic minimum taxes will interact with Australia’s hybrid mismatch rules, foreign hybrid rules, controlled foreign company regime and foreign income tax offsets and whether there may be potential double taxation issues.

Please see this KPMG article on recent change to the Australian hybrid mismatch rules.

July 2024 Minister’s Second Reading Speeches

Dr Andrew Leigh, Assistant Minister for Competition, Charities and Treasury, Assistant Minister for Employment: 

• Taxation (Multinational—Global and Domestic Minimum Tax) Imposition Bill 2024 : Second Reading
• Taxation (Multinational—Global and Domestic Minimum Tax) Bill 2024: Second Reading
• Treasury Laws Amendment (Multinational—Global and Domestic Minimum Tax) (Consequential) Bill 2024: Second Reading.

July 2024 – ATO’s EOI on Pillar 2 Working Group

On 30 July 2024, the Australian Taxation Office announced that it is inviting interested parties to apply to be part of a new working group that will help carry out consultations on Australia’s implementation of the Pillar Two.

The ATO mentioned that the working group will focus on the administration of the global and domestic minimum tax, consulting on topics including the design of two new tax returns — one for Australia’s income inclusion rule and undertaxed profits rule, and the other for its domestic minimum tax.

The group will also consult on the “resources, systems, and processes” that in-scope multinational enterprises have adopted or are considering adopting to comply with the new rules, and on how the ATO “can support implementation through public advice and guidance, and co-designing client engagement approaches,” the notice says.

See also, Australia's adoption of implementation of global minimum and domestic minimum tax working group | ATO Software Developers.

Section 55 of the Constitution

H Evans, Odgers' Australian Senate Practice (Canberra: AGPS, 7th ed, 1995), Chapter 13.

• Constitutional provisions relating to financial legislation 

•   Section 53 of the Constitution 
•   Section 55 of the Constitution.

Hanks et al, Constitutional Law (Sydney: Lexis Nexis, 5th ed, 2024), pp. 151-164 (paragraphs 3.60 – 3.86).[24]

Position of major interest groups

• Graeme S Cooper, ‘The New Architecture of International Tax – Hope and Hype’, Australian Tax Review 53, no. 2, (6 July 2024).
• Amelia Teng (Deloitte), ‘Pillar Two primary legislation: Bills introduced - not significantly different from drafts; still a 1 Jan 2024 start date’, Thomson Reuters Weekly Tax Bulletin, Issue no. 029 (19 July 2024). See also, Amelia Teng (Deloitte), ‘Pillar Two exposure draft legislation released - the clock is ticking on a new tax world for MNEs’, Thomson Reuters Weekly Tax Bulletin, Issue no. 013 (5 April 2024).
• CPA Australia, Submission to An inquiry into the provisions of  Taxation (Multinational—Global and Domestic Minimum Tax) Imposition Bill 2024, the Taxation (Multinational—Global and Domestic Minimum Tax) Bill 2024 and the Treasury Laws Amendment (Multinational—Global and Domestic Minimum Tax) (Consequential) Bill 2024, 19 July 2024.
• Corporate Tax Association, Submission to An inquiry into the provisions of  Taxation (Multinational—Global and Domestic Minimum Tax) Imposition Bill 2024, the Taxation (Multinational—Global and Domestic Minimum Tax) Bill 2024 and the Treasury Laws Amendment (Multinational—Global and Domestic Minimum Tax) (Consequential) Bill 2024, 19 July 2024.
• Business Council of Australia, Submission to An inquiry into the provisions of  Taxation (Multinational—Global and Domestic Minimum Tax) Imposition Bill 2024, the Taxation (Multinational—Global and Domestic Minimum Tax) Bill 2024 and the Treasury Laws Amendment (Multinational—Global and Domestic Minimum Tax) (Consequential) Bill 2024, 19 July 2024.
• Herbert Smith Freehills, Submission to An inquiry into the provisions of  Taxation (Multinational—Global and Domestic Minimum Tax) Imposition Bill 2024, the Taxation (Multinational—Global and Domestic Minimum Tax) Bill 2024 and the Treasury Laws Amendment (Multinational—Global and Domestic Minimum Tax) (Consequential) Bill 2024, 19 July 2024.
• PwC Australia, Submission to An inquiry into the provisions of  Taxation (Multinational—Global and Domestic Minimum Tax) Imposition Bill 2024, the Taxation (Multinational—Global and Domestic Minimum Tax) Bill 2024 and the Treasury Laws Amendment (Multinational—Global and Domestic Minimum Tax) (Consequential) Bill 2024, 19 July 2024.
• Dr Shumi Akhtar, Submission to An inquiry into the provisions of  Taxation (Multinational—Global and Domestic Minimum Tax) Imposition Bill 2024, the Taxation (Multinational—Global and Domestic Minimum Tax) Bill 2024 and the Treasury Laws Amendment (Multinational—Global and Domestic Minimum Tax) (Consequential) Bill 2024, July 2024.
• Tax Justice Network Australia, Submission to An inquiry into the provisions of  Taxation (Multinational—Global and Domestic Minimum Tax) Imposition Bill 2024, the Taxation (Multinational—Global and Domestic Minimum Tax) Bill 2024 and the Treasury Laws Amendment (Multinational—Global and Domestic Minimum Tax) (Consequential) Bill 2024, 19 July 2024.
• Australian Energy Producers, Submission to An inquiry into the provisions of  Taxation (Multinational—Global and Domestic Minimum Tax) Imposition Bill 2024, the Taxation (Multinational—Global and Domestic Minimum Tax) Bill 2024 and the Treasury Laws Amendment (Multinational—Global and Domestic Minimum Tax) (Consequential) Bill 2024, 19 July 2024.  

Financial implications

The Explanatory Memorandum (p. 10) states that the estimated revenue is expected to increase by $370 million over the 5 years ending in 2026–27.

Table 1: Financial impact of the Bills ($ million)

2022–23	2023–24	2024–25	2025–26	2026–27	Total
-	-	-	160.0	210.0	370.0

Source: Explanatory Memorandum, Taxation (Multinational—Global and Domestic Minimum Tax) Bill 2024, Taxation (Multinational—Global and Domestic Minimum Tax) Imposition Bill 2024 and Treasury Laws Amendment (Multinational—Global and Domestic Minimum Tax) (Consequential) Bill 2024, p. 10.  

Compliance cost impact

The Explanatory Memorandum (p. 10) states that the Bills are expected to increase compliance costs for in-scope MNEs.

Impact Analysis

The Explanatory Memorandum (p. 10) states that the ‘Office of Impact Analysis has been consulted an impact analysis is required, OIA reference Number: 22-01540.’ At the time of writing this Digest, the Impact Analysis is yet to be published.

Licence