Chapter 1Introduction and background
1.1On 4 July 2024, the provisions of three related bills were referred to the Senate Standing Economics Legislation Committee for inquiry and report by 14August2024:
the Taxation (Multinational—Global and Domestic Minimum Tax) Bill 2024 (the Assessment Bill)
the Taxation (Multinational—Global and Domestic Minimum Tax) Imposition Bill 2024 (the Imposition Bill), and
the Treasury Laws Amendment (Multinational— Global and Domestic Minimum Tax) (Consequential) Bill 2024 (the Consequential Bill).
1.2Taken together, the bills would enact a 15percent global minimum tax and domestic minimum tax for multinational enterprises operating in Australia with an annual global revenue of at least €750 million (approximately A$1.2 billion). In doing so, the bills implement in Australa the domestic elements of a larger effort by the Organisation for Economic Co-operation and Development (OECD) and the Group of 20 (G20) to reform the international taxation rules and ensure that multinational enterprises pay a fair share of tax wherever they operate and generate profits in today’s digitalised and globalised world economy.
1.3This chapter of the report provides an overview of the bills, including key terms used in the bills, and outlines the context in which these reforms are being implemented.
1.4Chapter 2 summarises the views held by inquiry participants regarding the bill, and in turn provides the committee view and recommendation.
Conduct of the inquiry
1.5The committee advertised the inquiry on its website and wrote to relevant stakeholders to invite written submissions by 19 July 2024. The committee received and published eight submissions.
1.6The committee held one public hearing for the inquiry at Parliament House on 6 August 2024. The names of witnesses who appeared at the hearing can be found at Appendix 1. The committee also received additional information and answers to questions on notice, which are listed at Appendix 2.
1.7The committee thanks all inquiry participants for their contributions to the inquiry process.
Purpose of the bills
1.8The bills are intended to implement in Australia the domestic elements of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (the Inclusive Framework). The Inclusive Framework is intended to reform international tax laws to ensure, among other things, that certain large multinational enterprises (MNEs)pay at least a minimum tax of 15 per cent wherever they operate. This would be achieved by implementing two taxes in Australia: a global minimum tax, and a domestic minimum tax.
1.9The bills would enact a 15 per cent global minimum tax and domestic minimum tax for MNEs with an annual global revenue of at least €750 million (approximately A$1.2 billion at the time of writing), aligning Australia with approximately 60 other jurisdictions who have so far implemented a global or domestic minimum tax, or both.
1.10By setting out the framework and scope for the imposition of ‘top-up taxes’, the bills would implement the core rules of the international agreement.
Background
1.11As the Assistant Minister for Competition, Charities and Treasury, Dr Andrew Leigh, noted in his second reading speech, evidence suggests that close to 40 per cent of global MNE profits, or approximately US$600 billion, has shifted to low-tax countries each year.
1.12In one case, Google’s parent company Alphabet made US$19 billion in revenue in Bermuda, where Alphabet had virtually no workers or assets and was subject to a corporate tax rate of zero percent.
1.13The Assistant Minister further noted that while Australia’s aggregate tax burden across all levels of government is lower than the OECD average, Australia relies more heavily on company tax relative to other OECD countries, with company taxes comprising 19 per cent of Australia’s revenue base. Accepting the ‘accounting tricks and dodgy behaviour that multinationals engage in,’ the Assistant Minister concluded, ‘would have a massive impact on Australia’:
Multinational tax avoidance means fewer resources available to fund our schools and hospitals. It means small businesses face unfair competition from large multinationals that are using tax dodges that aren't available to smaller firms. The situation for local small businesses ends up being like a team forced to play against a headwind through the entire game.
The Two-Pillar Solution
1.14On 8 October 2021, Australia and 135 other members of the Inclusive Framework agreed to the Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy (the Two-Pillar Solution). This agreement is intended to reform international tax laws and ensure that multi-national companies pay fair tax wherever they operate.
1.15Such a multilateral convention seeks to redesign the international income tax system to adapt to new business models and tax challenges, overcoming outdated profit allocation rules, and also seeks to expand the taxing rights of market jurisdictions.
1.16The Two-Pillar Solution is comprised of Pillar 1, which aims to ensure fairer distribution of profits and taxation rights among countries with respect to MNEs, and Pillar 2, which is intended to ensure that in-scope MNEs are subject to a global minimum tax rate of 15 per cent.
1.17The Two-Pillar Solution is intended to be achieved through a series of tax reforms, including through the ratification of multilateral conventions and instruments. The government announced its intention to implement key aspects of Pillar 2 in the 2023-24 Budget.
1.18The three bills form part of a set of legislation to implement a global and domestic minimum tax in Australia, in accordance with Pillar Two.
1.19The Assessment Bill is intended to implement the framework in Australia for imposing top-up tax in accordance with the OECD Global anti-Base Erosion Model Rules (the GloBE Rules). The Imposition Bill and the Consequential Bill deal with, respectively, the imposition of the taxation, and the consequential and miscellaneous amendments necessary for administering the top-up tax.
1.20Subordinate legislation in the form of ministerial rules will be made to ensure that the bills operate effectively, and parts of the bills will retrospectively apply from 1 January 2024.
The Global anti-Base Erosion Model Rules
1.21The GloBE Rules were published by the OECD on 20 December 2021. The GloBE Rules set out the requirements and outcomes that a jurisdiction’s global and domestic minimum taxes need to meet in order to ensure that MNEs within scope are captured by these minimum tax reforms.
1.22The Commentary on the GloBE Rules and the GloBE Rules Administrative Guidance, approved by the Inclusive Framework and published by the OECD secretariat, provide helpful commentary and guidance on the interpretation and implementation of the GloBE Rules.
1.23Where a jurisdiction joins the common approach to implementing these tax reforms, they are not required to adopt the GloBE Rules. If the jurisdiction does adopt the GloBE Rules, the jurisdiction must implement and administer them in a way that is consistent with the outcome provided under the GloBE Rules and the Commentary on the GloBE Rules.
1.24The OECD has explained that the adoption of the GloBE Rulesby a critical mass of countries will be sufficient to ensure that MNEs are required to pay a minimum amount of tax on profits in each jurisdiction in which they operate. The GloBE Rules incorporate an agreed rule order with backstop and secondary rules that apply if the jurisdiction in which an MNE is based does not apply the primary rule.
1.25These interlocking rules mean that if an MNE Group is not subject to a 15 per cent minimum tax because, for example, the jurisdiction in which the group is headquartered has not implemented the GloBE Rules, ‘top-up taxes’ can be imposed in each other jurisdiction which has implemented the GloBE Rules and in which the MNE Group operates.
Impact Analysis
1.26The Office of Impact Analysis published its assessment of the proposed implementation of the Two-Pillar Solution (the OIA Assessment) in 2023. The OIA Assessment explains the background of the global problems which the Inclusive Framework and the Two-Pillar Solution are intended toaddress.
Pillar One and the scale without mass problem
1.27The bills that are the subject of this inquiry relate to the implementation of Pillar Two. However, the OIA Assessment description of Pillar One of the Two-Pillar Solution is briefly summarised here forcompleteness.
1.28The OIA Assessment outlines that Pillar One is intended to address the problem of ‘scale without mass’. This describes the operation of some large multinationals, which can operate at scale by using digital technology, thereby taking significant revenues without needing a traditional physical presence (or ‘mass’) in those countries. Licensing and intellectual property arrangements can allow companies to easily relocate profits to preferred jurisdictions. The existing issues over the production of value is amplified by the digital economy, where it is difficult to identify the internal economy of MNEs, such as the fair value of intellectual property licenses.
1.29This scale without mass problem has also led to the introduction of digital services taxes in some jurisdictions, which are based on profit. While these digital service taxes may be intended to address scale without mass concerns, the OECD has warned they could lead to ‘tit for tat’ traderetaliations, lower global Gross Domestic Product (GDP), and higher compliance costs forbusinesses.
1.30The OIA Assessment noted that, at the time of its publication, a number of detailed design elements had yet to be settled for Pillar One. It also identified that Pillar One is intended to ensure that the profits of large, profitable MNEs are taxed where products or services are consumed, and to stabilise the international tax system to avoid escalating tariffs by limiting the spread of digital service taxes.
Pillar Two and the race to the bottom for corporate income tax
1.31The OIA Assessment describes Pillar Two as addressing the problem of the ‘race to the bottom’ for corporate income tax rates. This problem results in ‘base erosion’, where the ability of all countries to raise revenue from taxing MNEs is eroded by international tax competition. The OIA Assessment also identifies that large MNEs can also obtain tax advantages compared to domestic businesses in relatively high tax countries.
1.32These bills are concerned with implementing Pillar Two. Pillar Two is primarily seeking to address the race to the bottom by establishing a global minimum tax of at least 15 per cent for large MNEs. Key elements of Pillar Two include the GloBE Rules, consisting of
an Income Inclusion Rule (IIR), to impose a top-up tax on parent entity for low-taxed income of a constituent entity, and
an Under-taxed Profits Rule (UTPR), to deny deductions requiring adjustments to the extent that low-tax income of a constituent entity in another jurisdiction is not subject to tax under an IIR.
1.33Pillar Two is also intended to create a more level playing field between large MNEs and domestic business. MNEs typically have access to additional tax minimisation strategies enabled from cross-border transactions with related parties, and the ability to access other, deliberate tax concessions which are generally designed to attract foreigninvestment.
Protections for developing countries
1.34Pillar Two also includes a Subject to Tax Rule (STTR), which is intended to address concerns from developing countries that have reduced their taxing rights on certain related-party income under bilateral tax treaties. If a member country of the Inclusive Framework is taxing certain income below the STTR minimum rate, the member country would be required to include an STTR into its bilateral tax treaty when requested to do so by the developing country treatypartner. This is intended to allow developing countries the ability to retain taxing rights on certain payments that may have otherwise been ceded under a tax treaty.
1.35The GloBE Rules also acknowledge that some developing countries have called for transparent, mechanical and predictable rules to reduce incentives for MNEs to shift profits out of developing countries. While the GloBE Rules are expected to reduce the pressure on governments to offer wasteful tax breaks for MNEs, they also provide a ‘substance carve-out’ for certain income. This is based on payroll and assets, and allows jurisdictions to continue to offer tax incentives reducing tax on routine returns from investment in substantive activities without triggering top-up taxes under the GloBE Rules.
Receipts and costs from the policy measures
1.36The OIA Assessment estimated that, with the implementation of Pillar Two, receipts will increase by $370 million and increase payments by $111 million over the five years from 2022-23. This is in addition to benefits arising from a decreased tax differential between Australia and other countries, and the support for Australian domestic businesses through reducing large MNEs’ access to tax advantages.
1.37The OIA Assessment, as published in March 2023, notes that ‘it is too early to formalise a revenue impact estimate for Australia regarding Pillar One at this stage.’ However, the OECD has estimated that direct negative investment impacts from higher taxation under Pillar One and Pillar Two would lead to a reduction of global GDP of less than 0.1 per cent, and that this cost would be more than offset by factors such as greater investment certainty and reduced compliance costs.
1.38The OIA Assessment also notes that the implementation of Pillar Two along with many other jurisdictions is expected to have no material direct impact on Australian consumer experiences. The OIA Assessment outlines the expectation for there to be minimal impact from any cessation of multinational activities in Australia. It further highlights that, due to Australia’s current corporate income tax rate being above 15 per cent, it is unlikely that any Australian-based new investment projects will be negatively affected by Pillar Two.
1.39The OIA Assessment notes that there will be compliance costs as a result of the implementation of Pillar One and Pillar Two. The OECD considers global compliance costs from Pillar One will be relatively minor compared to the revenues of in-scope MNEs. However, it is likely that some Australian entities will see increases in compliance costs due to recruitment, training and external advisory.
1.40The OIA Assessment also identified that implementing Pillar One would introduce a high level of complexity, due to the international nature of the work requiring many stakeholders to work together to understand and comply with the rules.
1.41The OIA Assessment states that the ‘compliance costs of Pillar Two on in-scope business are expected to be significant’, and that ‘[s]ignificant increases in the upfront costs of large multinationals’ time and investment are expected’.
Provisions of the Assessment Bill
1.42The Assessment Bill is intended to ensure that Australia will meet the requirements set out in the GloBE Ruleswhen introducing the global and domestic minimum taxes in accordance with the Two-Pillar Solution.
Meaning of some key terms
1.43The Assessment Bill defines several terms that are important not only for understanding the operation of the bill, but also for the interpretation of the ExplanatoryMemorandum. Some of these terms, in bold text for ease of reference, are set out below.
Meaning of Entity, Main Entity, and Ultimate Parent Entity
1.44An Entity is:
any legal person, other than a natural person and specified political bodies; or
an arrangement that is required to prepare separate financial accounts, such as a partnership or trust.
1.45A Main Entity is the Entity that includes the Financial Accounting Net Income or Loss (FANIL) of the Permanent Establishment in its financial statements.
1.46An Ultimate Parent Entity means either:
an Entity holdinga Controlling Interest in another Entity, and which does not have a Controlling Interest in it held by another Entity; or
a Main Entity that has one or more Permanent Establishments in another jurisdiction.
Meaning of Controlling Interest and Ownership Interest
1.47For the purposes of the GloBE Rules, where an Ultimate Parent Entity holds a Controlling Interest in another entity, the Ultimate Parent Entity will consolidate the Entity’s assets, liabilities, income, expenses, and cash flows, on a line-by-line basis, into its Consolidated Financial Statements (CFS)pursuant to the applicable Acceptable Financial Accounting Standard. The Main Entity in respect of a Permanent Establishment is deemed to hold a Controlling Interest in that Permanent Establishment.
1.48An Ownership Interest is any interest equity interest carrying rights to the profits, capital or reserves of an entity, and is used for the purposes of determining a Parent Entity’s Allocable Share of top-up tax.
Meaning of Permanent Establishment
1.49A Permanent Establishment is a place of business that is situated in a jurisdiction other than where the Main Entity is located, and that is either:
treated as a permanent establishment in accordance with an applicable Tax Treaty in force, if the jurisdiction taxes the income attributable to it in accordance with a provision similar to Article 7 (the Business Profits article) of the OECD Model Tax Convention; or
if there is no applicable Tax Treaty in force: a place of business in respect of which a jurisdiction taxes the income attributable to that place of business under its law on a net basis similar to the manner in which it taxes its own tax residents; or
if the jurisdiction has no corporate income tax system: a place of business that is situated in that jurisdiction and that would be treated as a permanent establishment in accordance with the OECD Model Tax Convention, if the jurisdiction would have had the right to tax the income attributable to it in accordance with Article 7; or
if none of the above definitions are satisfied: a place of business if business operations are conducted outside the jurisdiction where the Main Entity is located, and the income attributed to those operations is exempt from income tax in that jurisdiction.
1.50For the purposes of the Assessment Bill, Permanent Establishments are treated as Constituent Entities, separate from the Main Entity and any other Permanent Establishment. However, this creates a legal fiction that is unique to this taxation framework. It has no impact on any other Australian taxationlaws.
Meaning of Excluded Entity
1.51The list of Excluded Entities is provided in the Assessment Bill, and includes but is not limited to Governmental Entities, Non-profit Organisations, and Entities prescribed by the Rules.
Meaning of Group, MNE Group, and Constituent Entity
1.52A Group generally comprises Group Entities, including:
a Ultimate Parent Entity, and
one or more other Entities, each of which is related through ownership or control such that the assets, liabilities, income, expenses and cash flows of the entity are included in the CFS of the Ultimate Parent Entity.
These Group Entities are Constituent Entities if they are not ExcludedEntities.
1.53If a Group consists of multiple Group Entities, any Group Entity that:
carries on business at or through a Permanent Entity in one or more other jurisdictions, and
includes the FANIL of those Permanent Establishments in its financial statements,
is the Main Entity in respect of those Permanent Establishments.
1.54If the Main Entity is not an Excluded Entity, the Permanent Establishments are Constituent Entities, separate from the Main Entity and the other Constituent Entities. Such Permanent Establishments are not Group Entities, because they are not Entities.
1.55An MNE Group consists of a Group that includes at least one Entity or Permanent Establishment that is not located within the jurisdiction of the Ultimate Parent Entity of the Group. It also includes a single Main Entity together with its Permanent Establishments.
Meaning of Joint Venture
1.56An Entity is a Joint Venture if the Entity’s financial results are reported under the equity method in the CFS of an Ultimate Parent Entity of an MNE Group for the Fiscal Year and the Ultimate Parent Entity’s Ownership Interest Percentage in the Entity is at least 50 per cent.
1.57A Joint Venture Group consists of the Joint Venture and its Joint Venture Subsidiaries.
1.58A Joint Venture Subsidiary includes any Entity whose assets, liabilities, income, expenses and cash flows are consolidated by the Joint Venture under an Accepted Financial Accounting Standard, or would have been if the Joint Venture had been required to do so under that Standard.
1.59A Joint Venture Subsidiary is excluded from being a Joint Venture.
Effects of the Assessment Bill
1.60With the Imposition Bill, the Assessment Bill would ensure that Domestic Minimum Top-up (DMT) tax, Income Inclusion Rule (IIR) tax, and Under-taxed Profits Rule (UTPR) tax can be imposed in Australia through ‘top-up tax amounts’.
1.61The Commissioner of Taxation will have general administration of the Assessment Bill. This means that the Assessment Bill will be brought within the definition of taxation law, and will ensure that a liability to pay Australia DMT, IIR, or UTPR tax is a tax-related liability.
1.62The Assessment Bill would ensure that MNEs within the scope of the GloBE Rules are subject to tax of at least 15 per cent in respect of the GloBE income arising in each jurisdiction in which the MNEs operate, consistent with the GloBE Rules.
1.63The OECD has published the Minimum Tax Implementation Handbook (Pillar Two), (the Pillar Two Handbook) which provides guidance on the implementation of Pillar Two. The Pillar Two Handbook, and the steps for assessing MNE liability under the new taxes, are laid out further below.
GloBE Threshold
1.64The GloBE Threshold is determined by reference to the consolidated annual revenue of the MNE Group. The threshold is set at €750 million, and includes revenue from Excluded Entities in the MNE Group, and revenue from Joint Operations as consolidated in the CFS of the Ultimate Parent Entity.
1.65Top-up tax computations are applicable to an MNE Group satisfying the GloBEthreshold.
1.66To satisfy the GloBE threshold, an MNE Group must have an annual revenue, as shown in the CFS of the Ultimate Parent Entity, of at least €750 million for at least two of the four Fiscal Years immediately preceding that year. Such an MNE Group meeting the threshold is called an Applicable MNE Group.
1.67In determining revenues for the GloBE threshold, if an MNE Group presents gross gains and gross losses from investments separately, then the MNE Group must reduce revenues by the amount of the gross losses to the extent of gross gains from investments.
1.68For financial entities which may not record gross amounts from transactions in their financial statements with respect to certain items, the item(s) considered ‘similar to revenue’ under the Ultimate Parent Entity’s financial accounting standards should be used in the context of financial activities. For example, if the income or gains from a financial transaction are appropriately reported on a net basis under the Ultimate Parent Entity’s financial accounting standards, the term ‘revenue’ means the net amount from the transaction.
1.69Where a Ultimate Parent Entitydoes not prepare a CFS, the CFS of the Ultimate Parent Entityare instead those that would have been prepared, if such an Entity were required to prepare such statements in accordance with an Authorised Financial Accounting Standard, adjusted for Material Competitive Distortions.
1.70The Rules are intended to prescribe how to translate currencies other than Euros into Euros for determining whether the GloBE Threshold is met, as well as outlining relevant guidelines regarding mergers and acquisitions for the GloBEThreshold.
Top-up tax
1.71Top-up taxes would be imposed on profits made by entities in jurisdictions in which relevant MNEs operate and where the effective tax rate (ETR) is below the 15 per cent global minimum rate. The GloBE Rules set out the entities, groups, and other arrangements that are either within, or excluded from, the scope of the top‑uptax.
1.72The starting point for the imposition of Australian global and domestic minimum taxes is that entities with a top-up tax amount are liable to pay tax. The bill distinguishes between Domestic Top-up Tax Amounts, IIR Top-up Tax Amounts, and UTPR Top-up Tax Amounts. These amounts would respectively attract DMT tax, IIR tax, and UTPR tax.
1.73The meaning of ‘top-up tax amount’ for each of these different top-up taxes is delegated to the Rules. This is intended to ensure that internationally agreed developments are implemented in a timely, efficient manner, while retaining parliamentary oversight of Australian law.
Domestic Minimum Top-up tax
1.74Australia DMT tax would allow Australia to collect additional tax on excess profits of Constituent Entities of MNE Groups located in Australia in order to bring the effective tax rate up to the 15 per cent minimum rate.
1.75There are OECD requirements that a jurisdiction must meet when imposing DMT tax so that it will be a ‘Qualified’ DMT tax.
1.76The GloBE Rules allow, but would not require, a jurisdiction which is implementing the GloBE Rules to adopt a DMT tax. Where a jurisdiction does adopt a DMT tax, it would need to be consistent with the outcomes under the GloBE Model Rules, as this consistency is important to ensure that the DMT tax is a Qualified Domestic Minimum Tax.
Income Inclusion Rule tax
1.77IIR tax would allow jurisdictions to apply a top-up tax on residential multinational ‘parent’ companies where the group’s income in another jurisdiction is being taxed below the minimum of 15 per cent.
1.78Australian IIR tax would be imposed on certain parent entities of MNE Groups within the scope of the bills. The Australian IIR tax would apply in respect of undertaxed profits of Constituent Entities within an MNE Group operating in low-tax jurisdictions.
1.79For example, if an MNE had its headquarters in Australia, but it had foreign subsidiaries in another jurisdiction where it paid an effective tax rate of 10 per cent, Australia may be able to apply an IIR top-up tax on the parent company equivalent to 5 per cent of the foreign subsidiaries’ profits.
Under-taxed Profits Rule tax
1.80UTPR tax will apply when a jurisdiction could, but does not, impose IIR top-up tax in respect of another jurisdiction’s low tax income. In such a case, all jurisdictions that have implemented a UTPR top-up tax regime would be able to collect top-up tax, in amounts allocated between these jurisdictions by a substance-based allocation key provided in the GloBE Rules. Broadly, a country with proportionately more tangible assets and employees would receive a larger allocation of the UTPR top-up tax.
1.81For UTPR tax, jurisdictions can decide whether to apply UTPR as a denial of deduction under existing corporate income tax, or through an equivalent mechanism. In Australia, an equivalent mechanism, rather than a denial of deduction, is to be adopted.
Handbook on implementation
1.82The Pillar Two Handbook provides an explanation of the core provisions of the GloBE Rules. This includes core provisions which set out the scope and operation of the GloBE Rules. The following is a non-exhaustive summary of the six steps outlined in the Pillar Two Handbook for MNE Groups to calculate top-up tax liability.
1.83The first step is determining whether an MNE Group is within the scope of therules.
1.84The second step is determining the location and income of each Constituent Entity, based on the local tax treatment and FANIL as shown in the financial accounts used to prepare the MNE Groups’ consolidated financial statements. Where financial information is not maintained separately in respect of an entity, accounts or reports will need to be prepared to compute the amount that should be reflected in the financial accounts, because the GloBE Rules primarily rely on accounting information.
1.85The third step is calculating the GloBE income or loss of each Constituent Entity. Adjustments will be made to the FANIL, in accordance with Article 3.2 of the GloBE Rules, to better align the tax base with the adjustments typically applied for local tax purposes. Illegal payments are not allowed as an expense in computing the GloBE income or loss, but payment of fines or penalties are allowed as an expense up to €50 000.
1.86The fourth step is to determine adjusted covered taxes. The starting point for this step is the current tax expense as shown in the FANIL financial accounts, and then removing any taxes that are contained in the current tax expense but are not Covered Taxes. This includes a mechanism to take into account taxes of a Constituent Entity that are not recorded in the tax line of the profit and loss statement and to exclude taxes that are not related to GloBE income or loss. Adjustments can also be made for certain cross-border taxes, and post-filing where there are changes in tax liability after filing.
1.87The fifth step is to compute the Effective Tax Rate and calculate the top-up tax. GloBE income or loss and the Covered Taxes of each Constituent Entity are added to compute the effective tax rate (ETR) in a jurisdiction. Once the top-up tax is calculated, it is allocated to each constituent entity in the low-tax jurisdiction which has GloBE income for the Fiscal Year, in proportion to such income. An illustration of the formula for calculating jurisdictional top-up tax isbelow:
Figure 1.1Calculation of the Effective Tax Rate and Top-up Tax
Source: OECD, Minimum Tax Implementation Handbook (Pillar Two), October 2023
1.88The sixth step is to charge the top-up tax under either the ‘Qualified’ DMT tax, the IIR tax, or the UTPR tax.
1.89Where a jurisdiction introduces a DMT tax that is consistent with the GloBE Rules, that tax will be considered a ‘Qualified’ Domestic Minimum Tax (QDMTT). This domestic tax offsets top-up liability under the GloBE Rules, reenforcing a jurisdiction’s primary right of taxation over its own income.
1.90In the computation of top-up tax in a given jurisdiction, any QDMTT paid in another jurisdiction shall be deducted.
1.91If the jurisdiction in which a low-taxed Constituent Entity is located does not have a QMDTT, the jurisdiction where the Ultimate Parent Entityof that entity is located may collect top-up tax under the IIR.
1.92Under the IIR, the minimum tax is paid at the parent entity level, in proportion to its ownership interests in the entities that have been allocated top-up tax. The IIR is generally applied to the Ultimate Parent Entitybut may be applied further down the ownership chain if the Ultimate Parent Entityis not subject to an IIR.
1.93The UTPR acts as a backstop, ensuring that minimum tax is paid where an entity with low-taxed income is held through a chain of ownership that does not result in the low-taxed income being brought into charge under an IIR.
1.94The UTPR works by requiring a payment of tax by resident entities with the jurisdiction applying UTPR, which increases tax at the level of the entities. This payment may arise through a denial of deduction for expenses or through another mechanism. The payment will be determined according to formula, in proportion to the share of tangible assets and employees in a given jurisdiction. The payment will be sufficient to result in the group entities paying their share of top-up tax remaining after the IIR.
1.95Because there will typically be subsidiaries in several different jurisdictions, administering the UTPR requires a higher level of administrative co-operation, which makes standardised information reporting requirements even moreimportant.
Provisions of the Imposition Bill
1.96The Imposition Bill deals with the imposition of top-up tax, and in accordance with section 55 of the Constitution, it only deals with imposition of that tax.
1.97It is intended to ensure that Domestic Minimum Tax (DMT) tax, Income Inclusion Rule (IIR) tax, and Under-taxed Profits Rule (UTPR) tax are imposed in respect of the profits of MNEs that have been undertaxed.
1.98The Imposition Bill would commence at the same time as the Assessment Bill, and only if the Assessment Bill commences.
Provisions of the Consequential Bill
1.99The Consequential Bill sets out consequential and miscellaneous provisions necessary for the collection and recovery of Australia DMT, IIR, and UTPR taxes.
1.100The Consequential Bill amends the Taxation Administration Act 1953 (TA Act) to ensure that a number of mechanisms under the TA Act, such as those relating to the recovery of debts, the issue of information collection notices, and the lodgement of documents, apply to taxes introduced by the bills.
1.101The Consequential Bill would amend the TA Act to require information and tax returns related to the proposed GloBE Pillar 2 taxes to be provided to theCommissioner.
1.102The Consequential Bill also covers situations in which foreign government agencies and Australian authorities are to exchange GloBE Information Returns, which contain ‘the information required to assess an entity’s tax liability consistent with the GloBE Rules’, and the notification requirements where a foreign government agency receives such a return.
1.103The Australian IIR/UTPR Tax Return is a tax return specific to Australia forming the basis for the Commissioner’s assessment of Australian IIR and UTPR tax. Similarly, the Australian DMT Tax Return is a tax return specific to Australia, forming the basis of the Commissioner’s assessment of Australian DMT tax for Australian tax purposes. The Consequential Bill establishes requirements regarding exemptions and obligations regarding the provision of these returns.
Safe Harbour Provisions
1.104The OECD published the Safe Harbour Rules on 20 December 2022, outlining the common understanding of transitional penalty relief for implementing jurisdictions. These rules include provisions to the effect that tax administrations should consider not applying penalties or sanctions in connection with the filing of GloBE Information Returns during a Transition Period where a tax administration considers that an MNE Group has taken reasonable measures to ensure the correct application of the GloBE Rules.
1.105Safe Harbour provisions are intended to be contained in the rules.
Rulings of the Taxation Commissioner
1.106Entities will be able to seek rulings on the application of the Assessment Bill. However, the Commissioner will have discretion to decline to make a ruling in a range of circumstances that make it not reasonable to comply with such an application. For example, this would include circumstances where the OECD Inclusive Framework has published new guidance which Australia is planning on incorporating into domestic law but has not yet done so.