Australia has implemented Pillar 2 of the OECD/G20 Two Pillar Solution, introducing a global and domestic minimum tax designed to ensure large multinational enterprise (MNE) groups pay a minimum effective tax rate of 15% in each jurisdiction in which they operate.
The rules apply to a MNE with annual revenue of 750 million Euros disclosed in the consolidated financial statements of the ultimate parent entity in at least 2 of the 4 fiscal years preceding the test year. Therefore, we expect most CbC Reporting entities will qualify.
The Australian Pillar Two rules are complex and introduce new reporting, lodgement and payment obligations for in scope groups, with the first Australian returns (for year ended 31 December 2024) due by 30 June 2026.
How do the rules operate?
If a group entity in a low-taxed jurisdiction has an effective tax rate below 15%, then the rules generally require that the MNE parent entity applies a top up tax in its’ jurisdiction via an ‘Income Inclusion Rule’ (IIR) to ensure that an effective minimum tax rate of 15% is achieved for the subsidiary.
If the parent entity is based in a country that is not a signatory to the rules, then a top up tax can be allocated to other countries by an Undertaxed Profits Rule (UTPR).
To avoid other countries from collecting top up tax, many countries including Australia chose to apply a Qualified Domestic Minimum Top-Up Tax (QDMT) which provides for primary taxing rights to allow that country to impose its own top-up tax first. This then means that the originating country has a minimum effective tax rate of 15% so the IIR or UTPR should not apply.
What are the lodgement requirements?
The rules are complex and require significant information to be provided and effective tax rate calculations to be performed. This will be provided to authorities via filing of a GloBE Information Return (GIR). This will generally be lodged with the revenue authority in the jurisdiction of the MNE parent entity and will be shared with other revenue authorities.
For non-parent entities in Australia, filing consists of:
- GloBE Information Return (GIR), unless already lodged overseas and therefore shared with the ATO
- Foreign Lodgement Notification (if GIR lodged overseas)
- Australian IIR/UTPR Tax Return (AIUTR)
- Australian DMT Tax Return (DMTR)
The ATO is developing a combined return comprising the Foreign Lodgement Notification, AIUTR and DMTR. This will be known as the Combined Global and Domestic Minimum Tax Return (CGDMTR).
Very few exemptions exist and it appears that even dormant entities that are members of a MNE group will still have filing requirements.
An Australian entity may nominate another Australian member of the MNE group, a Designated Local Entity (DLE) to file on its behalf.
Safe harbour rules
The OECD and ATO allow various ‘safe harbour’ rules which assume a top up tax in Australia of zero. The main rule is the ‘transitional CBC reporting’ safe harbour which if the Public Country by Country Reporting qualifying criteria are met, should eliminate the requirement for complex effective tax rate calculations. However, even if a safe harbour rule is available, lodgement of a $nil return is still required.
MNE parent in a jurisdiction not signed up to Pillar 2
While the ATO has not yet issued instructions, it appears that even if a MNE parent entity is located in a jurisdiction that has not signed up to Pillar 2, the ATO still requires a GIR to be lodged. This will provide significant challenges to subsidiaries that do not have the information or resources to complete it.
Side by side rules
The OECD has issued a ‘Side by Side’ package that allows for the Pillar 2 rules to operate in conjunction with other minimum tax frameworks operated by other countries. This is primarily in response to negotiations with the United States that has not adopted the Pillar 2 rules. So far, only the United States appears to qualify for the side by side framework.
These rules provide further safe harbours and including deemed $nil IIR and UTPR top up taxes where the MNE parent entity is located in a qualifying jurisdiction.
The side by side rules have not yet been implemented in Australia and in any case will only apply to financial years commencing from 1 January 2026 and are not retrospective. Therefore, for the 2024 and 2025 years, affected groups must still prepare and lodge a GIR.
Lodgement requirements and penalties
The GIR and CGDMTR will generally be due 12 months after a parent entity’s year end. However, for the first year, an extended lodgement period of 18 months requires lodgement by 30 June 2026 for entities with a 31 December 2024 year end.
Late lodgement penalties applying to Significant Global Entities of 500 times the standard penalty rate will apply. Currently, this provides a minimum penalty of $165,000 for up to 28 days late.
Noting that at the time of writing, the ATO has still not issued final tax returns or instructions with the due date of the first return less than 3 months away, the ATO has indicated it will look kindly on lodgement deferral requests where reasonable measures have been taken to comply on time.
How can Exant Advisory assist?
Exant Advisory can assist entities to:
- Assess whether they are ‘in scope’ for the Pillar 2 rules
- Assess if they qualify for a safe harbour
- Assist with preparation and lodgement of CGDMTR
- Assist with nominations of DLE
- Where parent entities are in jurisdictions that have not adopted pillar 2, assist with GIR requirements including deferral requests.
Contact your usual Exant advisor or alternatively, our International Tax Partner, Jamie Towers via the button below or call 07 3218 3900.
