Pillar Two - Domestic Minimum Tax - Draft Legislation Released for Consultation

On Thursday 21 March, Treasurer Jim Chalmers made an announcement in relation to the release of draft legislation implementing global and domestic minimum taxes in Australia.

The release follows the Government’s announcement in the 2023-24 Federal Budget to implement a 15% global minimum tax and domestic minimum tax for multinational companies. The measures are part of an international co-operation led by the OECD, in implementing Pillar Two of the Two Pillar Solution to addressing the tax challenges arising from the digitalisation of the economy in Australia.

The draft measures broadly apply to multinationals with consolidated revenue greater than or equal to 750 million euros.

The Rules

The draft legislation implements the following:

1. 15% global minimum tax for multinational enterprises through the:
   • Income Inclusion Rule (IIR) applicable to income years starting on or after 1 January 2024 which imposes tax on the parent entity of the group if it is located in Australia for any of the members of the group that have less than 15% effective tax rate
   • Undertaxed Profits Rule (UTPR) applicable to income years starting on or after 1 January 2025, which applies if the parent entity of the group is located in a country that has not implemented the 15% global minimum tax. The UTPR imposes the 15% minimum tax on the members of the group that are in countries that have implemented the 15% minimum tax in relation to the members of the group with less than 15% effective tax rate
2. 15% domestic minimum tax applicable to income years commencing on or after 1 January 2024. This imposes additional tax on Australian members of the multinational group that have an effective tax rate of less than 15%, where the domestic minimum tax has been imposed it will reduce the tax payable under the IIP and the UTPR.

Draft Documents for Consultation

The following were released by Treasury for consultation:

• Primary legislation including the core technical and administrative measures
• Subordinate legislation including finer details in relation to calculations and metrics used in implementing the Rules
• A discussion paper seeking feedback regarding potential amendments to certain tax provisions that will need changes to account for Global and Domestic minimum taxes to ensure that there are no unintended domestic income tax consequences. These measures include the hybrid mismatch rules, foreign hybrid entity rules, foreign income tax offsets and controlled foreign company rules.

BDO is reviewing the draft legislation and considering making submissions as part of the Treasury consultation process. Feedback is due in relation to the primary legislation and subordinate legislation by 16 April 2024 and 16 May 2024 respectively.

BDO Comment

Should you have any questions regarding the Pillar Two measures, please contact your BDO tax adviser for further guidance and visit our tax services page to see how we can help.