Chapter 2Views on the bills
2.1This chapter examines inquiry participants’ views on the provisions of the bills, as well as anticipated issues regarding the rules that would be made under the new legislation.
Role of subordinate legislation
2.2Submitters and witnesses focused on the rules that are expected to be made under the bills. Inquiry participants said that the bills are important for establishing a legal framework for these taxes to be implemented in Australia but mentioned that the rules to be made under the bills would be important for working out the final amounts of tax that MNEs are liable to pay.
2.3The Corporate Tax Association (CTA) characterised the implementation of the reforms as a two-part process, being the ‘bills before committee and the broader rules which underline the mechanics and the calculations for these rules to apply.’ The CTA supported provision of detailed information about the proposed timeline for the introduction of subordinatelegislation.
2.4In their submission, the CTA suggested that the subordinate legislation should be considered as a part of the inquiry. At the public hearing, representatives of the CTA expanded on this position, stating:
Given the subsequent rules will be a disallowable legislative instrument, and they are a critical factor for the operation of the rules, we wish to see those rules also be subject to some parliamentary scrutiny, whether it be through this committee or some other process. However, we understand that might not be possible given the timeframes and the broader process of disallowable instruments. As such, we would like to add a recommendation to our submission that the proposed implementation review be legislated.
2.5CPA Australia sought further clarity on how provisions of the Income Tax Assessment Act 1997 would interact with the Pillar Two rules, such as how tax consolidation rules would interact with the subordinate legislation where the acquisition or disposal of a controlling interest in a head company or tax consolidated group is concerned.
2.6PwC also sought continued consultation on the development of the rules for affected taxpayers.
2.7At the public hearing, Professor Graeme Cooper, representing Herbert Smith Freehills (HSF), noted that HSF’s submission did not focus on the content of the model rules, but instead focused on the manifestation of the bills in Australian domestic law. He noted that the Parliament was largely powerless to change the rules, and that it would not be in Australia’s interests to modify the rules so that Australian domestic rules were no longer qualifying under the international framework.
2.8At the public hearing, representatives of the Treasury explained that certain details of the legislative framework are to be included in regulation made under the bills. They explained that, as large complex model rules, it is expected that the GloBE Model Rules willevolve over time.
2.9Representatives of the Australian Taxation Office (ATO) stated that the process of confirming that these Australian top-up taxes would qualify is underway, with the OECD still developing the processes of assessment for qualification of these taxes. However, the ATO confirmed that they have been very conscious in drafting to reflect the need for Australian top-up taxes to qualify under the OECD framework.
2.10Treasury officials pointed to the fact that the fourth and most recent iteration of the administrative guidance was received in June 2024. They stated that the use of subordinate legislation to designate these details is intended to allow ‘an appropriate degree of flexibility to be built into Australia’s regime in a timely and efficient manner’. It would also ensure that the Australian regime ‘retains a sufficient degree of parliamentary oversight’.
Costs of enforcement and compliance
2.11CPA Australia submitted that, based on figures contained in the Impact Analysis, only a small proportion of in-scope entities would be subject to top-up taxes, and that the introduction of this tax in Australia would significantly impact the compliance obligations of affected entities. They suggested that the government explore opportunities to reduce compliance burdens and consider compliance costs.
2.12Submissions from PwC and the Business Council of Australia echoed this sentiment. They stated that the complexity of the framework means it is critical for the changes to be administered in a proportionate way, minimising compliance costs for the companies that must comply with the changes proposed.
2.13CPA Australia also identified that taxpayers with a financial year ending on 31 December would need to consider their financial reporting disclosures at the reporting date. As a result, they suggested that the government work with the Australian Accounting Standards Board to issue specific, timely guidance regarding the substantive enactment date or the purpose of financial reporting obligations.
2.14The ATO confirmed their awareness of the potential compliance costs facing MNEs as a result of the Two-Pillar Solution. They highlighted that MNEs will largely face the same compliance costs on the basis that 60 other countries will be implementing the GloBE Rules, and that any further marginal costs imposed by Australian legislation are arguably not significant.
2.15The ATO explained the consultation processes that have been undertaken in support of implementing Pillar 2, and that they have been working with other tax administrations around the world. They specifically highlighted that the ATO asked potentially affected MNEs, their advisers and industry groups about what potential advice and guidance topics that they would like to receive from the ATO.
Safe harbour provisions
2.16PwC also identified that establishing a permanent safe harbour to simplify compliance with the GloBE Rules could reduce the number and complexity of calculations that MNEs are required to make. They encouraged the ongoing efforts to develop such a safe harbour with the OECD.
Differential treatment of taxes
2.17The proposed differential treatment of taxes paid under GloBE Rules was raised as a concern during the inquiry. HSF submitted that there was an ‘unstated predisposition to treat tax paid under the GloBE rules as not being “real” tax.’ Their submission identified situations in which tax deductions may be allowed for companies paying foreign corporate tax, but not for companies paying foreign GloBE taxes.
2.18During the public hearing, Treasury representatives confirmed that the Consequential Bill deals with matters involving the interaction of the GloBE Rules and the Income Tax Assessment Act 1997, including matters such as foreign income tax offsets. They also reassured the committee that ‘there’s been clarification of some of the issues that we’ve been working through with industry and stakeholders.’
Non-adoption or retaliatory measures
2.19Some inquiry participants expressed concerns about potential non-compliance or relation from jurisdictions that may oppose the implementation of the minimumtaxes.
2.20At the public hearing, Professor Graeme Cooper drew the committee’s attention to ‘the prospect that embarking on this path will provoke retaliation from the United States’, warning that the United States may ‘change its stance from indifference to hostility’, and that Pillar 2 would probably not be able to survive that hostility.
2.21The submission from HSF identified that the United States did not sign a previous convention for the implementation of base erosion and profit shifting measures in 2017, and that some evidence suggests ‘a degree of inability or unwillingness on the part of the US to implement the OECD’s agenda, including the Two Pillar Solution.’
2.22HSF also noted in their submission that if the US does not implement the Two Pillar Solution, that alone is not fatal to the design of the GloBE regime, which has been deliberately constructed to be fire-proof against this possibility. Nevertheless, HSF stated that it is a valid question to ask about the merits of pursuing the policy in 2024, given US threats of retaliation against Australiancompanies.
2.23At the public hearing, representatives of the CTA stated that the process of designing the OECD framework has been a long-running one, starting from around 2008 and running through to 2021. They expressed the view that, as a result of Australia and other countries leading the implementation of these minimum taxes, some developing nations are implementing or going to implement minimum taxes. For this reason, the CTA saw importance in Australia being part of and supporting this solution.
2.24The Treasury also indicated that it is aware of the US position regarding Pillar 2 and that it is monitoring that position, but they reiterated that implementation of Pillar 2 is occurring in over 60 countries, as part of a multilateral effort.
Joint and several liability
2.25The Australian Securitisation Forum (ASF) identified an issue that may arise for the purposes of securitisation. At the public hearing, a representative of the ASF explained that securitisation depends on being able to provide instruments that are graded, which depends upon tax liabilities not falling upon entities in ways that are unpredictable with respect to the quantity and timing of those liabilities.
2.26HSF, in its submission, also identified issues that could arise from the proposed joint and several liability of Group Entities. HSF indicated that joint and several liability could introduce risk wherever where a subsidiary is purchased, because no-one ‘can be confident when buying a subsidiary that they aren’t also buying a GloBE tax liability quite disproportionate to the size of the target.’
2.27Representatives of HSF identified application of Pillar 2, where some constituent entities are subject to top-up taxes due to the activities and effective tax rates applicable to another entity in a different, low-tax jurisdiction, means that an entity’s tax liability may be unpredictable in terms of quantum and timing of those liabilities.
2.28The ASF also highlighted that securities entities have previously been excluded from changes made to thin capitalisation amendments to the Income Tax Assessment Act 1997.
2.29At the public hearing, Treasury representatives confirmed that they understood and are considering the issues raised by the ASF regarding the potential impacts on securitisation in Australia.
2.30Treasury acknowledged that these issues were brought to their attention after the introduction of the bills to Parliament and identified that the further guidance released by the OECD in June 2024 elaborates on the issue of securitisation. The ASF also identified that OECD guidance released in June 2024 recommends secure entities should not be taken into account as entities subject to top-up taxes.
2.31Treasury confirmed that implementation details have been left to the disallowable instrument rather than primary legislation in order to retain flexibility for matters such as those concerning securitisation.
Committee’s view
2.32The committee notes that the subordinate legislation to be produced under the bills is intended to enable flexibility for implementing these important, multilateral tax reforms. As established in the public hearing for this inquiry, updates to the OECD guidelines for the GloBE Rules may happen regularly, making this flexibility important.
2.33The committee is reassured that the detail to be provided in the subordinate legislation will enable the government to maintain flexibility to address evolving implementation requirements, while still ensuring that all necessary criteria are met for the Australian taxes to be qualifying taxes under the international framework.
2.34The committee welcomes that the ATO has engaged in consultation with affected entities about these measures and has sought to ensure that their compliance costs are minimised.
2.35The committee further notes that the ATO has confirmed their collaboration with tax administrators around the world, and that this should ensure that multinational enterprises are not required to duplicate reporting and other compliance tasks across jurisdictions.
2.36The committee welcomes evidence that the OECD, through the collaborative development of Pillar Two over many years, has sought to reduce the likelihood of any one jurisdiction preventing implementation of these measures, and notes that over 66 countries have committed to the multilateral implementation of these reforms, with 33 already progressing legislation.
2.37The committee finally notes that the bills contribute to the series of broader reforms to multinational tax payments and transparency that have been progressed in this parliament.
2.38The committee recommends that the bills be passed.
Senator Jess Walsh
Chair
Labor Senator for Victoria