This consultation represents an important step in Australia's engagement with the BEPS 2.0 project, and in particular its implementation of the GloBE rules. Alia Lum, Peter Oliver, Denis Larkin, and Jeremy Capes outlines the consultation's two-fold focus.
Treasury has released a consultation paper (the Paper) today in respect of Australia's participation in the OECD's BEPS 2.0 project, which is a global multilateral agreement to address the tax challenges arising from the digitalisation of the economy (known as the Two-Pillar Solution).
Overview of BEPS Pillars One and Two
Pillar One involves the reallocation of taxing rights to market jurisdictions and applies to very large and profitable multinational groups (MNEs). The amount of taxing rights to be redistributed is termed Amount A, and only applies where a MNE has global revenues exceeding €20 billion and also has a profit-before-tax to revenue ratio exceeding 10 percent. Amount B of Pillar One aims to standardise the remuneration of related party distributors that perform baseline marketing and distribution activities.
Under Pillar Two, the Global Anti-Base Erosion (GloBE) rules seek to impose a global minimum 15 percent tax. The GloBE rules apply to MNEs with annual consolidated revenue exceeding €750 million and broadly require the MNE to pay a minimum 15 percent tax on its income in each jurisdiction where that income is reported for financial reporting purposes.
There are two interlocking components to the GloBE rules, the Income Inclusion Rule (IRR) and Undertaxed Payments Rule (UTPR). The IIR is the primary rule, and applies a 'top up tax' on the profits of subsidiaries and branches of MNEs that have a GloBE effective tax rate of less than 15 percent. Any top up tax is generally borne at the ultimate parent entity level. The UTPR is a secondary rule that allows the 'top-up tax' to be collected by other countries where the IIR has not been fully applied or where the ultimate parent entity itself is low taxed.
GloBE model rules were released by the OECD in late 2021, and require incorporation into domestic laws around the world. Consistent with other members of the OECD/G20 Inclusive Framework on BEPS, Australia has agreed that if it implements these rules, they will be in accordance with the model rules.
The other part of Pillar Two is the Subject to Tax Rule, which is to be included in bilateral tax treaties and applies to certain payments taxed at rates below 9 per cent. Details of the Subject to Tax Rule are still under negotiation at the global level.
Matters for consultation
The consultation is not in relation to the policy rationale of the Two-Pillar Solution, or the majority of the design features themselves, rather it is about their application and implementation in Australia. In particular, the consultation is focused on the GloBE rules, including the implementation of a domestic minimum tax.
The Paper has 40 questions for consultation, including canvassing the following areas:
- How the Two-Pillar Solution might impact investment decisions and behavioural changes
- The areas of uncertainty in relation to implementation, and how these can be addressed.
- What challenges are foreseen in relation to the OECD timelines, which have Pillar Two coming into effect in 2023 and Pillar One in 2024.
- Compliance cost aspects, including what changes to processes and systems are anticipated for businesses in order to comply with Pillar Two.
- How Australia should implement the GloBE rules into domestic law, including interaction considerations.
- The scope, design and conditions of access to a GloBE safe harbour.
- Whether Australia should adopt a domestic minimum tax, in addition to the Pillar Two rules.
This consultation represents an important step in Australia's engagement with the BEPS 2.0 project, and in particular the implementation of the GloBE rules in Australia. A productive consultation process is essential to ensuring Australian legislation operates effectively and as intended, and provides Treasury with feedback to support Australia's ongoing negotiations on various parts of the rules that are yet to be formulated.
Given the Government has already publicly committed to implementing BEPS 2.0 as part of its pre-election plan, the consultation paper does not cover whether or not Australia should adopt these rules. Instead, the focus is primarily two-fold. Firstly, in relation to the regulatory impacts and specifics associated with an Australian implementation, and secondly on canvassing the appropriateness of including a domestic minimum tax in Australian law.
In relation to Pillar One, Treasury estimates that no Australian headquartered multinationals currently fall within the scope of Amount A of Pillar One due to the financial services and extractives exclusions in those rules (however, this may change in future years). In addition, Treasury considers it too early to formalise a revenue impact estimate for Australia. Similarly, there is no revenue impact estimate for Australia for Pillar Two, although Treasury considers that the implementation of Pillar Two will help strengthen Australia's corporate tax base.
An important aspect of the consultation is whether Australia should adopt a domestic minimum tax of 15 per cent, and whether it should be designed as a qualifying or non-qualifying top up tax. This would allow Australia to impose a top up tax on Australian parent companies, subsidiaries and branches taxed below 15 per cent, rather than allowing other jurisdictions to collect the revenue. The paper also seeks feedback on whether such a domestic minimum tax should apply only to those multinational groups that are within the scope of Pillar Two, or whether it should apply also to groups that are wholly domestic.
One key aspect of the implementation is the date from which it the rules should become effective – this is left as an open question in the paper. We expect Treasury will receive strong feedback requesting a delay to at least 2024, and this mirrors the approach taken by other governments around the world including the UK, EU and Switzerland.
Treasury is also seeking feedback on the estimated compliance costs of implementation. The rules are complicated, and it is expected a number of groups will require systems changes to capture the information needed to comply. In this regard, the design of safe harbour rules to simplify the compliance process, which is still under negotiation by Inclusive Framework members, will be important.
We encourage feedback to be provided to Treasury as part of the consultation process. The consultation period is open to 1 November 2022.
As a 2023 start date has not yet been ruled out, and with a domestic minimum tax on the cards, in-scope groups may have limited time to prepare for these measures. This includes considerations for financial statement disclosures as early as the 2023 financial year. Planning for implementation should commence with an impact assessment to determine at risk jurisdictions and a data gap assessment to determine systems changes needed to comply.