A Review of the Australian Global Minimum Tax Rules

General

On December 23, 2024, Australia issued the Taxation (Multinational—Global and Domestic Minimum Tax) Rules 2024 (the ‘Rules’) to provide for the detailed application of the Pillar 2 GloBE rules in Australia.

This follows the Australian GloBE legislation that was published in the Royal Gazette on December 10, 2024. This includes:

-Treasury Laws Amendment (Multinational—Global and Domestic Minimum Tax) (Consequential) Act 2024 (the ‘Consequential Law) – to provide for administrative provisions relating to the GloBE rules and consequential amendments to other legislation.

–Taxation (Multinational—Global and Domestic Minimum Tax) Act 2024 (the ‘Law’) – to provide the general framework for the application of the GloBE rules.

–Taxation (Multinational—Global and Domestic Minimum Tax) Imposition Act 2024 (the ‘Imposition Law) – a very short act that provides for the imposition of top-up tax (to comply with Article 55 of the Australian Constitution).

The legislation includes an income inclusion rule (IIR) and an under-taxed profits rule (UTPR).

The IIR is to apply to financial years beginning on or after January 1, 2024. The UTPR will apply to financial years beginning on or after January 1, 2025.

Part 2(2) of the Law provides that Australia will apply a domestic minimum top-up tax (DMTT), (intended to be a QDMTT) for financial years beginning on or after January 1, 2024.

In the January 2025 Central Record of Legislation with Transitional Qualified Status issued by the OECD, Australia’s IIR and DMTT are both treated as qualified for GloBE purposes.

GloBE Application

Whilst the Laws include a number of key definitions and they provides for the general framework of the GloBE rules (including the administrative provisions for filing and payment), the majority of the detailed provisions are provided in the Rules.

The Rules include details on:

-computing and allocating income;
-computing and allocating adjusted covered taxes;
-safe harbours;
-adjustments for the DMTT;
-application of the rules to investment and tax transparent entities; and
-transitional provisions for MNE Groups

The Rules are apply retrospectively from January 1, 2024 (aside from the UTPR provisions).

The Explanatory notes to the Rules state that the power to make Rules governing GloBE application was included in the legislation to ensure that any OECD Administrative Guidance can be incorporated efficiently and in a timely manner, while still retaining an appropriate level of parliamentary oversight. It will also allow the swift correction of any unforeseen consequences that arise from the implementation of the law.

It also clarifies that the Rules may, via reference, incorporate extrinsic materials in force at the time they are made or at another fixed point in time. Therefore, it may be that the OECD guidance could, in future, be directly transposed into the Rules.

In the Law, Section 3 provides that the provisions of the Law and Rules are to be interpreted in a manner consistent with:

-the OECD Model Rules;
-the OECD Commentary;
-the OECD Agreed Administrative Guidance;
-the OECD Safe Harbours and Penalty Relief Guidance; and
-any other document prescribed by the Rules.

The definition of the Administrative Guidance includes all four sets of Administrative Guidance issued by the OECD in place up to the effective date of the legislation.

OECD Administrative Guidance

The only aspects of the OECD Administrative Guidance included in the law are:

-Sovereign wealth funds and the definition of Ultimate Parent Entity (Section 1.4 AG1);

-June 30, 2026 filing deadline (Section 5.3 AG3); and

-GloBE Securitisation Entities are excluded from joint and several liability (Section 6.1.4 AG4).

The Rules include many other aspects of the OECD Administrative Guidance including:

-Rebasing monetary thresholds in the GloBE Rules (Section 1.1 AG1);

-Consolidated deferred tax amounts (Section 1.3 AG1);

-Clarifying the definition of ‘Excluded Entity’ (Section 1.5 AG1);

-Meaning of “ancillary” for Non-Profit Organisations (Section 1.6 AG1);

-Intra-group transactions accounted at cost (Section 2.1 AG1);

-Forex hedge election (Section 2.2 AG1);

-Excluded Dividends – Asymmetric treatment of dividends and distributions (Section 2.3 AG1);

-Debt release Election (Section 2.4 AG1);

-Accrued Pension Expenses (Section 2.5 AG1);

-Covered Taxes on deemed distributions (Section 2.6 AG1);

–Excess Negative Tax Carry-forward guidance (Section 2.7 AG1);

–Substitute Loss carry forwards (Section 2.8 AG1);

-Equity Gain or loss inclusion election (Section 2.9 AG1);

-Allocation of taxes arising under a Blended CFC Tax Regimes (Section 2.10 AG1);

-The extension of the taxable distribution method election to insurance investment entities (Section 3.1 AG1);

-Exclusion of Insurance Investment Entities from the definition of Intermediate Parent Entity and Partially-Owned Parent Entity (Section 3.2 AG1);

-Restricted Tier One Capital (Section 3.3 AG1);

-Liabilities related to Excluded Dividends and Excluded Equity Gain or Loss from securities held on behalf of policyholders (Section 3.4 AG1);

-Portfolio shareholding election (Section 3.5 AG1);

-Application of Tax transparency election to Mutual insurance companies (Section 3.6 AG1);

-Deferred tax transitional rules (Section 4 AG1);

-Currency conversion rules (Second Set of OECD Administrative Guidance);

–Transferable Tax Credits (Second Set of OECD Administrative Guidance);

-SBIE rules (Stock-based compensation election, leases, impairment losses and the deemed 50% requirement where employees perform work outside the employer’s jurisdiction for the SBIE) (Second Set of OECD Administrative Guidance).

A number of aspects of the Third Set of OECD Administrative Guidance (issued in December 2023) that relate to the Transitional CbCR Safe Harbour are included in the Rules (see below).

The Rules also include limited aspects of the Fourth Set of OECD Administrative Guidance (issued in June 2024), including:

-Extension of taxes pushed down to include Reverse Hybrids

-Option to not impose top-up tax liabilities on SPVs used in securitization transactions (unless all the entities located in Australia are Securitisation Entities)

-Amendments to the Switch-Off rule

Safe Harbour and Penalty Relief Guidance

The Safe Harbour provisions are included in the Rules.

Part 8-2, Division 2 of the Rules includes the Transitional CbCR Safe Harbour.

The application of the Safe Harbour rules align with the OECD Safe Harbour guidance.

The Rules also include all aspects from the December 2023 OECD Administrative Guidance that include additional provisions for the Transitional CbCR Safe Harbour, including:

-Purchase Accounting Adjustments (the consistent reporting condition, goodwill impairment adjustment);

-Same Financial Statements/Local Financial Statements for Statutory Reporting;

-Using different accounting standards;

-Adjustments to Qualified Financial Statements/Dividend Mismatches;

-MNEs not required to file CbC Reports;

-Transitional CbCR – Qualified Financial Statements for PEs;

-Transitional CbCR – Treatment of Taxes on income of PEs, CFCs, and Hybrid Entities;

-Transitional CbCR – Treatment of hybrid arbitrage arrangements.

Sections 8-200-8-220 of the Rules provide for the QDMTT Safe Harbour. It provides that the Minister will issue a legislative notice to determine jurisdictions that have QDMTT Safe Harbour status. Therefore, the list published by the OECD under its Transitional Qualification Mechanism will not have direct effect in Australia.

Section 8-210 of the Rules apply the OECDs Switch-Off rule where a QDMTT jurisdiction decides:

-not to impose a QDMTT on Flow-through Entities created in its jurisdiction;

-not to impose a QDMTT on Investment Entities subject to equivalents Articles 7.4-7.6 of the OECD Model Rules;

-to adopt an equivalent of Article 9.3 (international activity exemption) without limitation;

-to include JVs or members of a JV Group within the scope of the QDMTT but imposes the liability on Constituent Entities of the main group instead of directly on the members of the JV Group;

-that a Constituent Entity that is a Securitisation Entity:

– is excluded from the scope of the QDMTT; or
– is included in the scope of a QDMTT but the QDMTT is not imposed on that Entity.

Note that the switch-off rule does not apply if a QDMTT jurisdiction imposes the QDMTT liability of a Securitisation Entity on another Constituent Entity of the MNE Group that is not a Securitisation Entity, or imposes the QDMTT liability directly on the Securitisation Entity only if it is the only Constituent Entity in the jurisdiction and the QDMTT liability could not otherwise be collected.

Part 8-2, Division 3 of the Rules provide for the Simplified Calculations Safe Harbour with this applying to Non-Material Constituent Entities under Section 8-175 of the Rules.

The Transitional UTPR Safe Harbour is included in Section 8-225 of the Rules.

Elections in the OECD Model Rules/Administrative Guidance

The only election includes in the Law is the Excluded Entity Election (Section 20(5) of the Law).

The other elections included in the OECD Model Rules are provided in the Rules. All elections included in the OECD Administrative Guidance (aside from the June 2024 Administrative Guidance) are included in the Rules. 

Section 2.64 of the Explanatory Statement to the Rules provides that an MNE Group that has Constituent Entities that are in an Australian Tax Consolidated Group (TCG) may make an Aggregate Reporting Election to elect to be treated as a single Constituent Entity for the purposes of reporting domestic top-up tax (DMTT) amounts in the GloBE Information Return.

To make an annual election, a Filing Constituent Entity must meet all of the following conditions:

• the taxable profits and losses of the consolidated entities are aggregated for the purposes of computing a single tax liability (irrespective of whether the consolidated entities might be jointly and severally liable for the tax charge on behalf of the group);

• all consolidated entities are wholly owned by the consolidating entity;

• constituent entities or members of a JV Group within the TCG are located in the same jurisdiction for GloBE purposes; and

• the Filing Constituent Entity makes an election to apply the consolidated treatment.

Deviations from the OECD Model Rules/Administrative Guidance

The main differences relate to the design of the QDMTT and the implementation of the OECD Administrative Guidance.

Sections 9-45(3) and (4) of the Rules include rules equivalent to Article 9.3.5 of the OECD Model Rules for the Initial Phase of International Activity Exemption. This is an optional anti-avoidance rule for corporate inversions that jurisdictions can choose to implement or not. It relates to the transitional rule that excludes MNEs from the under-taxed payments rule for the first five years of operations.

There is the potential for an MNE group to use the UTPR transitional rules to avoid or minimise Pillar Two top-up tax.

This is because if an MNE group had its Ultimate Parent Entity (UPE) in a jurisdiction it would generally be subject to the Income Inclusion Rule (IIR) on low-taxed profits of its foreign constituent entities. However, the UTPR transitional rules treats all jurisdictions as having no UTPR top-up tax liability.

Therefore, a UPE could restructure the group to create a new UPE in a jurisdiction that did not implement an IIR. The UTPR would then not apply to its foreign subsidiaries providing the conditions were met for the UTPR transitional rule.

Therefore, Article 9.3.5 of the OECD Model Rules includes an optional provision that allows a jurisdiction to apply the UTPR to MNE groups that have a foreign UPE but significant operations in that jurisdiction.

Sections 2-40/2-50 of the Rules apply a special rule for Australian tax consolidated groups. This applies to a Constituent Entity of an MNE Group that:

(a) is a subsidiary member of a consolidated group; and

(b) is not any of the following:

(i) an Investment Entity;
(ii) an Insurance Investment Entity;
(iii) a Securitisation Entity for the Fiscal Year.

If a low-taxed constituent entity has an amount of UTPR or DMTT, the head company will be liable to pay the Top-up Tax Amount. The low-taxed constituent entity will, therefore, not have any Top-up Tax liability, as the entire Top-up Tax Amount will be allocated to the head company. This also applies to Australian Multiple Entry Consolidated Groups (MECs).

Section 5-50(5) of the Rules provides for deemed election for the purposes of the Substance-based Income Exclusion (SBIE).

If the GloBE Information Return filed for a Fiscal Year for an MNE Group by a Filing Constituent Entity for the MNE Group:

(a) does not compute the SBIE amount for a jurisdiction; or

(b) does not claim the SBIE amount for a jurisdiction in the computation of jurisdictional Top-up Tax for the jurisdiction;

the MNE Group is taken to have made an SBIE election (that cannot be revoked).

Domestic Minimum Tax

General

Part 2(2) of the Law includes a domestic minimum tax (DMTT) (intended to be a QDMTT) for financial years beginning on or after January 1, 2024. Part 2-4 of the Rules provides for the detailed application of the provisions.

In the January 2025 Central Record of Legislation with Transitional Qualified Status issued by the OECD, Australia’s DMTT is treated as a QDMTT and qualifies for the purposes of the QDMTT Safe Harbour.

QDMTT Design Features

Section 2-25 of the Rules applies the DMTT to:

-Constituent Entities located in Australia;

-Stateless Constituent Entities created in Australia including Stateless PEs with a place of business or deemed place of business in Australia (under the OECD Administrative Guidance, a DMTT does not need to apply to Stateless Constituent Entities to be a QDMTT. However, jurisdictions can impose a QDMTT on these entities when they are created under the domestic law of the jurisdiction);

-A Main Entity not located in Australia with a Permanent Establishment located in Australia which is low-taxed; or

-JVs, or JV Subsidiaries located in Australia

Section 2-35(3)/(4) of the Rules apply the provisions of the June 2024 OECD Administrative Guidance and provide that if there are other Constituent Entities in the jurisdiction with GloBE Income or Loss, the Top-up Tax liability of the securitisation entity will be allocated to the Constituent Entities with GloBE Income or Loss, consistent with the general rules.

If the Constituent Entities in the jurisdiction do not have GloBE Income or Loss, the securitisation entity’s top-up tax liability will be allocated equally to all Constituent Entity’s in the jurisdiction. The only instance in which the securitisation entity will be liable to pay a Top-up Tax Amount is if the securitisation entity is the only Constituent Entity in the jurisdiction.

The amount of top-up tax under the DMTT is the top-up tax calculated under the general GloBE rules. The Rules then provide for a number of adjustments.

It applies irrespective of the shareholdings in the group entities located in Australia. This reflects the OECD Administrative Guidance that provides that Top-up Tax that is subject to the QDMTT is based on the whole amount of the jurisdictional Top-up Tax calculated, irrespective of the ownership interests held in the Constituent Entities located in the QDMTT jurisdiction by any Parent Entity of the MNE Group.

Note that if a JV is a JV in respect of two MNE Groups each Applicable MNE Group will be liable for half of the total DMTT.

Tax paid or incurred by a Constituent Entity-owner under a CFC Tax Regime that is pushed down to a domestic Constituent Entity in the GloBE Rules must be excluded, as provided in the OECD Administrative Guidance. This is included in Section 2-35(6) of the Rules.

Section 2-35 also prevents the pushdown of tax to hybrids (and reverse hybrids), PEs and for taxes on distributions (aside from Australian withholding tax on distributions).

Whilst the original draft rules included the local accounting standard (and currency) rule, this is not included in the final Rules issued.

Therefore, the default GloBE rules apply and the DMTT is calculated using the financial accounting standard of the ultimate parent entity, and, if that is not practicable, on the basis of an accepted or approved accounting standard, if:

-the constituent entity’s financial statements are prepared in accordance with that standard;

-the information contained in the financial statements is reliable;

-in the case of an Authorised Financial Accounting Standard, the financial accounts have been prepared subject to adjustments to prevent any Material Competitive Distortions; and

-permanent differences of more than EUR 1 million are conformed with the UPEs accounting standard.

Section 2-40 of the Rules applies a special rule for Australian tax consolidated groups – see above.