Australia updates its Pillar Two rules: analysis of the 2026 Measures No. 2 amendments

On July 1, 2026, Australia issued the Taxation (Multinational – Global and Domestic Minimum Tax) Amendment (2026 Measures No. 2) Rules 2026 to amend the Taxation (Multinational – Global and Domestic Minimum Tax) Rules 2024.

Although the instrument commenced in July 2026, the amendments apply to fiscal years starting on or after 1 January 2024. The amendments incorporate elements of the OECD Agreed Administrative Guidance issued in December 2023, June 2024 and January 2026. The retrospective application is expressly supported by Australia’s primary Pillar Two legislation.

The principal changes concern:

These changes are technically significant. In particular, they can affect Australian Pillar Two calculations even where an MNE Group has no Australian top-up tax liability, because they alter how foreign CFC taxes are allocated, how entity classifications are determined, how deferred taxes are recognised, and how foreign jurisdictions are tested under Australian safe harbour rules.

Legislative Background

The Taxation (Multinational – Global and Domestic Minimum Tax) Act 2024 establishes liability for the Australian income inclusion rule, domestic minimum tax and UTPR. The detailed computational rules are principally contained in the 2024 Rules, which may be amended by legislative instrument under section 29 of the Act.

Section 3 of the Act requires the Australian legislation to be interpreted consistently with the GloBE Model Rules, the Commentary, Agreed Administrative Guidance, the December 2022 safe harbour document and any further prescribed materials. “Agreed Administrative Guidance” expressly includes the February 2023, July 2023, December 2023 and June 2024 guidance, as well as any other Agreed Administrative Guidance within the meaning of the GloBE Rules. The Commentary is incorporated on an “as amended from time to time” basis.

As such the OECD guidance forms part of the statutory interpretive direction. Nevertheless, the 2026 instrument remains important because it converts selected OECD outcomes into specific operative provisions in the Australian Rules. 

Retrospective application

The instrument commenced after registration in July 2026, but new section 15-15 provides that the amendments apply to fiscal years starting on or after 1 January 2024.

Section 32 of the primary Act disapplies the ordinary restriction in subsection 12(2) of the Legislation Act 2003 in relation to the Pillar Two Rules and instruments made under them. Retrospective application is intended to align the amendments with the commencement of Australia’s Pillar Two regime and the internationally coordinated implementation of the GloBE Rules.

Blended CFC allocation keys

Expanded computational perimeter

Part 1 of the instrument significantly modifies section 4-55, which allocates taxes arising under a Blended CFC Tax Regime.

The amendments expressly bring Permanent Establishments within the allocation-key calculation. They also remove existing jurisdictional restrictions and require the Constituent Entity-owner to take account of relevant entities and PEs regardless of whether they are located in the same jurisdiction as the tested Constituent Entity. Non-GloBE entities and PEs are treated as if they were Constituent Entities for the limited purpose of calculating their Blended CFC Allocation Keys.

The purpose is to prevent tax imposed under a blended CFC regime in respect of non-GloBE entities or PEs from being incorrectly allocated to ordinary Constituent Entities. The denominator or pool of allocation keys must reflect the full set of entities and PEs to which the blended CFC charge relates, even where some of those entities are outside the GloBE perimeter.

New section 4-56: GloBE Jurisdictional ETR

New section 4-56 introduces different methods for determining the GloBE Jurisdictional ETR depending on the status of the tested entity and whether a full GloBE ETR is otherwise required.

Where a Constituent Entity is subject to a full jurisdictional ETR calculation, the relevant ETR is computed without covered taxes imposed under a CFC regime. If the jurisdiction has a QDMTT, the calculation may include QDMTT payable to the extent that the blended CFC regime provides a foreign tax credit for that QDMTT on the same terms as other creditable covered taxes.

Where no full ETR is required:

-if the Transitional CbCR Safe Harbour applies, the Simplified ETR is used;

-if the QDMTT Safe Harbour applies, a hypothetical ETR is determined by reference to the QDMTT computation, including creditable QDMTT payable; and

-in other cases, a modified simplified ETR is calculated using information from Qualified Financial Statements instead of a Qualified CbC Report.

The first point is particularly important. A group that passes the Transitional CbCR Safe Harbour through the de minimis test or routine profits test – not the simplified ETR test – must nevertheless calculate and use its Simplified ETR for the blended CFC allocation key. The safe harbour therefore removes the full GloBE calculation but does not necessarily eliminate all ETR-related data requirements.

For an entity or PE that is not itself a Constituent Entity, the Rules generally use the ETR associated with the relevant Constituent Entity blending group in the same jurisdiction that has the largest attributable income. If there is no Constituent Entity in that jurisdiction, an accounts-based rate is determined from the aggregate covered taxes and income of the relevant non-GloBE entities and PEs.

Practical implications

The amendments are likely to be particularly relevant where an MNE Group has:

-a parent subject to a jurisdictional or otherwise blended CFC regime;

-branches or disregarded places of business;

-Investment Entities subject to a separate blending calculation;

-entities outside the GloBE perimeter;

-jurisdictions relying on the Transitional CbCR or QDMTT Safe Harbour; or

-multiple GloBE blending groups in the same jurisdiction.

Data models should therefore be capable of assigning attributable income and an appropriate ETR to entities and PEs that are not ordinary Constituent Entities. A system that limits its blended CFC calculation to Constituent Entities included in the standard jurisdictional GloBE computation may no longer produce the correct Australian result.

Substitute Loss Carry-forward DTA

Purpose of the substitute DTA