Year 2 is different.

For groups with a 31 December 2025 year end, the first substantive Pillar Two returns will generally be due by 31 March 2027, being 15 months after year end. Accordingly, MNE groups should already be considering their year 2 compliance strategy and data requirements.

The ‘no charging mechanism’ position no longer applies

One of the unique features of the first year of Pillar Two compliance was that many jurisdictions were not yet subject to any qualifying charging mechanism, being the Income Inclusion Rule (IIR), Domestic Minimum Tax (DMT) or Undertaxed Profits Rule (UTPR).

As a result, for the year ended 31 December 2024, some jurisdictions could effectively be excluded from substantive Pillar Two consideration because no jurisdiction had a charging mechanism to impose top-up tax in relation to those jurisdictions.

For the fiscal year ended 31 December 2025, this position changes significantly.

From fiscal years beginning on or after 1 January 2025, Australia’s UTPR commences. At the same time, many jurisdictions that did not previously apply an IIR or DMT have now introduced one or both charging mechanisms.

Consequently, jurisdictions that attracted limited Pillar Two attention during year 1 may now require a more detailed assessment. Finance teams should avoid assuming that conclusions reached during the 2024 compliance cycle remain valid for 2025.

More jurisdictions will require safe harbour analysis

For many groups, the 2024 exercise focused only on (a limited number of) jurisdictions where a charging mechanism existed and therefore where a potential top-up tax exposure could arise.

For 2025, safe harbour analysis may need to be performed for jurisdictions that did not require assessment in the prior year because no charging mechanism applied.

Where a jurisdiction satisfies one of the Transitional CbCR Safe Harbour tests, no full Pillar Two calculation will generally be required for that jurisdiction.

However, where none of the available safe harbour tests are satisfied, the MNE group may be required to undertake full GloBE calculations for that jurisdiction.

Accordingly, even where the underlying business has not changed materially, the number of jurisdictions requiring analysis may increase significantly from year 1 to year 2.

The transitional CbCR safe harbour ‘once-out, always-out’ rule becomes more relevant

As groups move into their second year of compliance, greater attention should be given to the operation of the TCSH rules.

Broadly, where a jurisdiction ceases to qualify for the TCSH for one year, that jurisdiction is unable to subsequently re-enter the safe harbour regime in a later year.

This ‘once-out, always-out’ concept means that safe harbour assessments should be undertaken carefully and supported with appropriate documentation.

The year 2 assessment therefore should not simply be viewed as a rollover of the year 1 position.

Jurisdictions not assessed in 2024 should not automatically lose access to TCSH

A practical issue likely to arise for many MNE groups concerns jurisdictions that were not required to be analysed in 2024 because no charging mechanism applied.

In our view, the fact that a jurisdiction was not required to consider the TCSH in 2024 should not, by itself, prevent that jurisdiction from relying on the TCSH when a charging mechanism first becomes applicable in 2025.

This situation should be distinguished from a jurisdiction that was assessed in 2024 and failed the TCSH requirements.

In other words, the fact that the TCSH was not relevant to a particular jurisdiction in year 1 should not necessarily preclude that jurisdiction from accessing the TCSH in year 2 when a charging mechanism becomes applicable.

Given the potential compliance savings that can arise from the TCSH, this distinction may be important for many MNE groups.

Group restructures may create additional Pillar Two compliance obligations

MNE groups that undertake restructures during the year should carefully consider the Pillar Two implications, even where the restructure appears relatively straightforward.

In particular, changes involving the identity of the Ultimate Parent Entity (UPE), the insertion of a new holding company, mergers, demergers, acquisitions, disposals, or changes to ownership chains can give rise to additional Pillar Two compliance requirements. In some cases, a single accounting period may involve multiple reporting obligations, separate filing positions, or different safe harbour assessments before and after the restructure.

Importantly, transactions that may appear routine from a legal or commercial perspective can have consequences for Pillar Two group composition, filing obligations, and the application of safe harbours. Accordingly, MNE groups should consider reviewing any restructuring activity undertaken during the year to determine whether it affects their Pillar Two compliance position, reporting obligations or filing approach. Early identification of these issues can help avoid unexpected compliance obligations and reduce the risk of errors when lodgement deadlines approach.

Governance & readiness remain critical

While many MNE groups may continue to benefit from the TCSH for the year ended 31 December 2025, this relief is temporary. Accordingly, organisations should use the transitional period to prepare for the point at which full GloBE calculations are required.

In our experience, groups that use the transitional years to enhance data collection processes, identify information gaps, and establish governance frameworks will be significantly better positioned when safe harbours cease to be available.

Management should therefore consider:

• whether the group currently captures all data that may be required to perform full GloBE calculations in future years
• whether roles and responsibilities between tax, finance, and accounting teams remain appropriate
• whether assumptions adopted during year 1 remain valid
• whether local advisors are required in newly implementing jurisdictions
• whether documentation supporting safe harbour positions is being maintained
• whether reporting to senior management and audit committees remains fit for purpose.

Revenue authorities around the world are increasingly focused on Pillar Two implementation, and MNE groups should expect greater scrutiny as the first substantive returns begin to be lodged. MNE groups that invest in preparing for full calculations during the transition period are likely to experience a more efficient and lower-risk compliance process when the TCSH is no longer available.

Don’t forget the tax provision process

For many MNE groups, Pillar Two was initially viewed as a future compliance exercise.

As year 2 approaches, Pillar Two considerations are becoming increasingly relevant to the annual tax reporting cycle. Finance teams should consider whether any Pillar Two developments may affect tax accounting positions, disclosures, governance processes, and audit discussions.

Early engagement between tax teams, finance teams, and auditors will generally result in a more efficient compliance process.

Looking ahead

The year ended 31 December 2024 was largely about understanding the new rules and determining whether transitional relief was available.

The year ended 31 December 2025 represents the next phase of the regime.
The commencement of Australia’s UTPR, the broader rollout of IIR and DMT regimes globally, and the need to assess additional jurisdictions under the Transitional CbCR Safe Harbour rules mean that many MNE groups will find year 2 materially different from year 1.

For MNE groups with a 31 December 2025 year end, the Pillar Two lodgement deadline is 31 March 2027. While this may appear some time away, experience suggests that MNE groups that commence planning early are better positioned to manage data collection, governance requirements, and filing obligations efficiently.

How SW can help

SW’s Pillar Two specialists can assist with:

• transitional CbCR Safe Harbour assessments
• review of year 1 positions and implications for year 2
• jurisdictional charging mechanism analysis
• governance frameworks and documentation for Pillar Two
• preparation and review of GloBE calculations
• lodgement obligations for Australian Pillar Two.

If you would like to discuss the implications of year 2 Pillar Two compliance for your group, please contact your usual SW advisor.

Contributors

Antony Cheung | Associate Director, Tax

The post Pillar Two in year 2 & what’s different from year 1 appeared first on SW Accountants & Advisors.

The GIR MCAA is an international agreement developed by the Organisation for Economic Co-operation and Development (OECD) and Group of 20 (G20) Inclusive Framework to support the implementation of the Pillar Two rules. It facilitates the automatic exchange of the GIR, a standardised set of data that enables tax authorities, such as the Australian Taxation Office (ATO), to assess whether multinational enterprise (MNE) groups are subject to a global minimum tax rate of 15% in each jurisdiction.

With Australia becoming a signatory, an MNE Group would be able to simplify and reduce its lodgement obligations across the jurisdictions in which it operates in by filing a single, centralised GIR. This GIR would be automatically shared with other signatory jurisdictions under exchange-of-information arrangements in accordance with the MCAA and the agreed dissemination approach under the OECD Inclusive Framework, rather than requiring separate filings by a designated local entity in each jurisdiction.

As of 2 February 2025, 26 countries, including United Kingdom, New Zealand, Japan, France, and Germany, have signed up to the MCAA, with more expected to do so before the first lodgement due date of 30 June 2026 for MNE Groups with an income year ending 31 December 2024.

A full list of signatory countries to the MCAA can be tracked here. Under the Tax Administration Act 1953, the group entities can nominate one entity (i.e. designated local entity or designated foreign filing entity) in the MNE Group to lodge one single GIR. This nomination is lodged in the first year with the ATO through a foreign lodgement notification form.

Note that neither China nor the United States (US) has implemented Pillar Two. Refer to our previous coverage on the ‘Side-by-Side’ (SbS) arrangement for further details.

How SW can help

We can assist in undertaking country-by-country analysis of the obligations and consideration of the application of exemptions and safe harbour rules.

We can also support the implementation of SW’s CTS Pillar Two software to facilitate the lodgement of the GloBE Information Return and other lodgement obligations.

In addition, we can help MNE groups assess the impact of the SbS arrangement and anticipated Australian legislative changes, identify data and systems gaps, evaluate safe harbour eligibility, and develop practical compliance strategies to manage ongoing Pillar Two obligations and costs.

Contributors

Antony Cheung

The post Australia signs the information exchange for GloBE Information Return (GIR)  appeared first on SW Accountants & Advisors.

The purpose of the instrument is to help multinational enterprise groups reduce compliance costs by removing the need to lodge certain global and domestic minimum tax return, where the Commissioner of Taxation considers it to be unnecessary because they could only ever disclose a nil liability.

Streamline your Pillar Two compliance with SW’s CTS Pillar Two software – designed to simplify lodgement of the GIR and domestic forms when exemptions don’t apply.

For more information on the Pillar Two obligations in Australia during the transition period, see our previous alert.

Below are the five main exemption pathways from the requirement to lodge the domestic minimum tax return (DMT).

Exemption to lodge an Australian Income Inclusion Rule (IIR)/ Undertaxed Profits Rule (UTPR) tax return

In addition, the draft instrument grants an exemption from the requirement to lodge the IIR/UTPR tax return, provided all conditions are met:

The Group entity:

• is not an Australian-located Parent Entity
• is an Australian-located Parent Entity of a wholly Australian group or
• is an Australian-located Parent Entity but a higher-tier Parent (intermediate or UPE) is required to apply a QIIR for the year

and any of the following apply:

• the Group entity is a subsidiary member of a TC/MEC group
• the Group entity is not GloBE-located in Australia and not a GloBE Main Entity for an Australian PE
• the Group entity is a GloBE Investment Entity or Insurance Investment Entity
• the Group entity is a GloBE securitisation entity meeting the relevant criteria or
• any of the group-level “switch-off” scenarios apply, i.e. Australia’s UTPR taxing rights would be wholly extinguished because:
• the group’s undertaxed profits are covered by the IIR charging mechanism such that Australia’s UTPR allocation would be zero or
• the Transitional UTPR Safe Harbour applies to the UPE jurisdiction and combined with IIR coverage elsewhere and thus reducing Australia’s UTPR allocation to zero.

For completeness, GloBE JVs and JV subsidiaries are not required to lodge an Australian IIR/UTPR tax return.

How we can advise your on Pillar Two with our CTS software

Navigating Pillar Two compliance can be complex, especially when determining which entities are exempt from lodging domestic forms. Our team can advise on your Pillar Two obligations by mapping your entities against the exemption categories each fiscal year. Where exemptions do not apply, we also support the implementation of SW’s CTS Pillar Two software to simplify and manage the lodgement of the Global Information Return (GIR) and Australian domestic forms.

We can assist in mapping your entities against the exemption categories each fiscal year to determine when lodging the relevant domestic forms is not required. 

We can also support the implementation of SW’s CTS Pillar Two software  to facilitate the lodgement of the GIR and Australian domestic forms, should the exemptions not apply.

In-person Pillar Two sessions will be held in Melbourne and Sydney on 15 and 23 October 2025 respectively. Reach out to your SW contacts for more information.

Contributor

Antony Cheung

The post ATO releases exemptions for Australian domestic Pillar Two forms appeared first on SW Accountants & Advisors.

Overview

Draft Practical Compliance Guideline PCG 2025/D3 outlines the ATO’s transitional compliance approach for lodgement obligations and penalties during the transition period (fiscal years starting on or before 31 Dec 2026 and ending on or before 30 June 2028).

Australia has introduced a 15% Global and Domestic Minimum Tax (Pillar Two Rules) aligned with the OECD’s Global Anti-Base Erosion (GloBE) Rules under Pillar Two. This targets large multinational enterprise (MNE) groups with consolidated revenues ≥ EUR750 million (AU$1.2 billion or US$820 million) in at least two of the four fiscal years preceding the tested year. The Pillar Two rules apply in Australia from 1 January 2024.

It is noteworthy that effective from 1 January 2025, the Undertaxed Profits Rule may subject an Australian MNE group member to top-up tax related to another group member. This is regardless of whether the former has any ownership interests in the latter. Consequently, auditors might require a Pillar Two analysis for the global group for the 2025 fiscal year.

What are the key lodgement obligations in Australia?

Applicable MNE Groups must lodge the following:

1. GloBE Information Return (GIR) – OECD- standardised form for calculating tax liability.
2. Foreign Notification Form (FNF) – Notifies the ATO of foreign GIR lodgement.
3. Australian IIR/UTPR Tax Return (AIUTR) – Assesses top-up tax under Income Inclusion Rule and Undertaxed Profits Rule.
4. Australian Domestic Minimum Tax Return (DMTR) – Assesses top-up tax on low-taxed Australian profits.

The AIUTR, DMTR, and FNF are consolidated into the Combined Global and Domestic Minimum Tax Return (CGDMTR). The GIR remains a standalone obligation. The returns are due 18 months after the fiscal year end for the first year and 15 months thereafter. For an MNE group with a fiscal year ending on 31 December 2024, the returns are due on 30 June 2026.

Importantly, the Australian members of an MNE Group must fulfil lodgement obligations in Australia, even if the Parent of the Group is in a country without Pillar Two rules implemented. The Australian entities may nominate one Australian Group Entity, known as the Designated Local Entity (DLE), to lodge the returns on behalf of the Australian entities.

As of the date of this document, Australia has not signed the Multilateral Competent Authority Agreement (MCAA) on the Exchange of GloBE Information (GIR MCAA) under Pillar Two. Until that happens, the GIR must be lodged in Australia with the ATO even if one has been lodged overseas.

Is there a “soft landing” in terms of penalties for taxpayers?

During the transition period, the ATO will adopt a “soft-landing” approach (i.e. penalties remitted) if the MNE group has demonstrated that reasonable measures were taken to comply.

Examples of reasonable measures include:

• documented implementation plans and internal policies
• system upgrades and gap analyses
• proactive engagement with the ATO and external advisors and
• timely correction of errors

Furthermore, no penalties should be imposed for isolated or good-faith errors during the transition period. However, gross indifference or failure to take reasonable care may be subject to penalties. Current administration penalties imposed upon Significant Global Entities apply in these circumstances.

How can SW assist?

We can assist with your Pillar Two project implementation by:

• implementing SW’s CTS Pillar Two Software for planning, Pillar Two calculations, and lodging GIR and domestic returns
• advising how Pillar Two will affect your group
• designing a Pillar Two implementation plan tailored to your group’s requirements
• identifying and classifying the entities within the group
• advising on the application of charging mechanisms
• assisting with Transitional CbCR safe harbour calculations

Contributors

Antony Cheung

The post Pillar Two obligations in Australia during the transition period appeared first on SW Accountants & Advisors.

本常见问答栏目针对支柱二的实施、对企业的影响以及合规要求这几方面的重要问题提出了看法。无论贵公司想了解实际税率、报告义务还是豁免，都可以在此找到清楚扼要的答案。

The post 支柱二常见问答：关于全球最低税的重要见解 appeared first on SW Accountants & Advisors.

AASB 18 Presentation and Disclosure in Financial Statements has been introduced to enhance the presentation of financial statement as well as for transparency and comparability in reporting a company’s operating results.

This new standard will significantly impact financial reporting for listed companies and other Tier 1 reporters. However, AASB 18 also provides management an opportunity to more closely align how they measure, and view performance compared to how is presented on the face of the statement of profit or loss. 

Why the changes?

Users of financial statements, especially investors, have raised concerns about the usefulness and comparability of  information from financial statements.

Some common issues impacting the quality of information in financial reporting include:  

• lack of clear definitions or guidance on how entities present their operating performance under previous standards
• divergence in practice regarding communication of alternative performance measures, commonly known as Non-IFRS measures or adjusted earnings
• material items being labelled as “other” in financial statements.
• AASB 18 was introduced to provide additional transparency and comparability for users of financial statements.

What are the changes?

There are three major changes under the new requirements:

1. New structure for presentation of profit or loss

The standard mandates that the profit or loss statement be structured into three categories:

• operating
• investing and
• financing.

It also introduces two new required subtotals:

• operating profit and
• profit before financing and income taxes.

AASB18 clarifies the definitions of the operating category and operating profit, ensuring consistency in how the company’s results are presented. There are new requirements for categorising and disclosing expenses, allowing for a more flexible presentation compared to the current binary classification based on function and nature.

2. Disclosure of how management views the performance

Many companies, especially listed entities, choose to report alternative performance measures, also referred to as “non-IFRS”, such as adjusted earnings, EBITDA, or adjusted EBITDA. Some of those measures will become Management-defined Performance Measures (MPMs) and will be subject to the new standard’s disclosure requirements.

If a company reports MPMs in other areas of reporting, such as the directors’ report, it must bring that information into the notes of the financial statements and reconcile it back to the nearest subtotal in the profit or loss statement. The tax and non-controlling interest (NCI) impacts of those reconciliation items must also be disclosed.

Management must explain in the notes the reasons for selecting the MPMs and any changes to these measures. All the MPMs and related disclosures will be subject to audit as they form part of the notes.

3. Grouping and labelling of information

There are enhanced requirements regarding the grouping of information and the disclosure of items labelled “other”. Further guidance is now available on how and when to aggregate or disaggregate information. 

Although AASB 18 primarily impacts the profit or loss statement, the new aggregate and disaggregated requirements may also impact on other areas of the financial statements.

Companies are also now required to present interest and dividends received under ‘investing cash flows’, while payments must be recorded under financing. Previous accounting policy choices regarding such presentations have been removed.

What will be the impact?

The adoption of the new standards is expected to have a major impact across all Tier 1 financial reports. Management will need to consider whether any of its contracts and remuneration, often linked to profit or loss, will be affected. Loan covenants linked to profit or loss may also need to be clarified.

Depending on existing systems and reporting processes, the financial reporting impact ranges from remapping the chart of accounts to requiring changes in systems and processes. For example, properly categorising foreign exchange transactions could be complex.

Companies will need to train internal staff involved in financial reporting and communicate changes to various internal and external stakeholders, as these changes may also impact on budgeting and forecasting tools and reports.

When to take action?

The new standard will be mandatory for the first time on 1 January 2027. For entities with a December year-end, this means it will apply to the year ending 31 December 2027. Comparative information will also be required.

Many listed companies report interim financial reports; AASB 18 will be applicable for any interim reporting starting 1 January 2027. 

Early adoption of the new requirement is permitted by the standard.

What about NFP and Tier 2 reporters?

For Tier 1 not-for-profit entities, the mandatory effective date is 1 January 2028, which is  one year later compared to their for-profit counterparts.

At this stage, AASB 18 does not apply to those preparing financial reports under the Simplified Disclosures Standard, commonly known as “Tier 2”. AASB is currently working on strategies for Tier 2 entities.

How SW can help

Our team of audit and assurance experts are fully informed of the requirements of the new accounting standard and can assist with providing guidance for your business, as well as keeping you abreast of developments from an Australian reporting context.

We can:

• provide additional information and training for staff 
• conduct an impact assessment and provide recommendations.

Reach out to your SW contacts or the key contacts here for a conversation.

Contributor

Jimmy Cao

The post AASB 18: Key changes in presentation of profit & loss of listed entities appeared first on SW Accountants & Advisors.

The High Court decision when released, is significant to Multinationals with commercial arrangements with third parties, given the ATO’s focus on royalties and intangibles arrangements and its position on ‘embedded royalties’. Furthermore, this is the first case to consider the application of Diverted Profit Tax (DPT), a punitive tax of 40% targeting Multinationals engaging in artificial arrangements to transfer profits offshore.      

While the majority found that payments under the two exclusive bottling agreements (EBAs) were between arm’s length parties and not royalties, all three judges agreed that even if the payments were for use of intellectual property (IP), the amounts ‘did not come home’ to Pepsico. This was because the nominated related entity supplying the concentrate is the creditor that SAPL (as a debtor) owed the obligation, not PepsiCo. The majority also determined that as the payments did not comprise of a royalty component, DPT, being the second issue considered, would not have applied to the arrangement.  

In its media release, the ATO has indicated practical guidance is being developed for publication in late 2024 to illustrate its view as set out in the draft ruling.  

Besides seeking special leave, the ATO also announced deferring the finalisation of draft ruling TR 2024/D1 (discussed here), relating to character of payments under software arrangement pending the outcome of the High Court proceeding.    

Key findings

Regardless of the outcome from the special leave application and given the lack of unanimous decisions, there is little doubt scrutinising intangible arrangements by the ATO to identify any ‘embedded’ royalties is here to stay.  

It is evident that the way a commercial agreement is being drafted is critical, from both the FFC’s majority and minority judgements, which ultimately can still be interpreted differently. Nevertheless, the Court has focused on the contractual terms of EBAs, with the majority substantially emphasising that the parties were dealing at arm’s length and engaged in extensive bargaining which resulted in the terms of the EBAs.  

The Court also expects the Commissioner and taxpayers when putting forward their position, providing qualitative and quantitative evidence to support the economic and commercial substance of the arrangement.   

Background 

In summary, the relevant facts of the case are as follow: 

• PepsiCo and Stokely-Van Camp (SVC) are both US tax residents and the respective owners to a portfolio of trademarks and designs to the Pepsi and Gatorade brands. 

• The companies entered into separate EBAs with Schweppes Australia Pty Limited (SAPL) to manufacture, bottle and package beverages in the Pepsi/Gatorade brands.  

• The EBAs expressively stipulated that SAPL would only pay for the concentrate and did not explicitly provide for any payment of royalty for the right to use the relevant IPs. However, the EBAs implicitly and explicitly allowed the use of the relevant trademarks and intellectual properties.  

• Under the EBAs, SAPL would purchase beverage concentrate from PepsiCo/SVC (or a related entity) according to formulas, specifications, etc provided to produce drinks for retail sale. From January 2018, such concentrate was purchased from a nominated Singapore entity CMPL through PBS, an Australian subsidiary of PepsiCo. 

• As there were no royalties under the EBAs, no withholding tax was paid in Australia.  

The Commissioner contended that: 

• Royalties were ‘embedded’ within the payments made by SAPL and subjected to Article 12 of the United States – Australia Double Tax Agreement. Accordingly, PepsiCo and SVC were liable for royalty withholding tax (RWHT) under s128B of the Income Tax Assessment Act 1936 of $3.6m.  

• Alternatively, one of the principal purposes in carrying out the scheme was to obtain a tax benefit (i.e. not liable for RWHT) such that DPT would apply. In this scenario, the tax liability pursuant under Part IVA would be $28.9m.  

Federal Court – single judge 

During the trial, Justice Moshinsky concluded that:  

• RWHT was payable on the implied use of PepsiCo’s trademarks and IP, otherwise SAPL would be unable able to package and sell beverages under PepsiCo’s and SVC’s brands. It also would not have made any payments if not for the use of IP. 

• The nomination of PBS as a seller of the concentrate constituted a direction to pay, but PepsiCo/SVC remained beneficially entitled for the purposes of Article 12 of the US DTA 

• DPT provisions would apply in the alternative position as PepsiCo/SVC obtained a tax benefit by not being liable to Australian RWHT and reducing their US tax on income. This arose from the disconnect between the legal form and economic substance of the EBAs, where payments covered concentrate and licence of trademarks. and other IPs.  

Full Federal Court decision 

First issue 

The majority (Justice Perram and Jackman) rejected the Commissioner’s argument (i.e. no royalties) on the basis that: 

• The EBAs were commercially negotiated contracts between third parties and there was no dispute as to the reasonableness of the contracts.  

• The Commissioner oversimplified the arrangement that only SAPL benefited from the granting of the licence and ignored any restrictions placed on SAPL’s entitlement to use the trademarks and other IPs (i.e only using the trademarks for the purpose of selling the beverages and nothing else). 

• The licence for the use of trademarks and other intellectual properties were not granted to SAPL for free, as the rights did not exist in insolation. Instead, such rights were intertwined with SAPL’s obligations to distribute the beverages.  

• There was no payment on direction since there was no antecedent monetary obligation owed by PepsiCo/SVC. As a related entity (i.e. PBS) was nominated as the seller in the EBAs, it was clear that PepsiCo/SVC would not be selling the concentrate and only contractually bound to ensure the quality of concentrate supplied. 

Justice Colvin in dissent, made the following observations: 

• Consideration stated in an agreement may not be required to separate into components corresponding different aspects because there was no commercial need to do so. Similarly, an amount calculated based on reference to pricing per unit of product supplied does not necessarily mean consideration is only paid for that product and nothing else. Circumstances known to the parties could resolve the ambiguity.  

• The EBAs were between PepsiCo/SVC and SAPL and should SAPL fail to purchase and/or pay under the agreements, PepsiCo would be the entity suing the breach, not the nominee.  

• The EBAs were properly construed as agreements to bottle, sell and distribute branded products, not agreements for the supply of concentrate. Accordingly, the payments made were partly in consideration for the use of trademarks which SAPL was licensed to use and supported the notion of an embedded royalty. 

• After PepsiCo nominated a related entity as the seller and the Nominee supplied the concentrate, PepsiCo/SVC no longer had beneficial entitlement to the income and thus not subject to RWHT. 

Second issue 

As the majority determined payments did not comprise of any royalty, this meant that Justice Moshinsky’s decision in the first instance that DPT could not apply (due to royalty issue taking priority) was incorrect. Accordingly, the FFC needed to consider the application of Part IVA.  

The majority found that there was no postulate that was a reasonable alternative to the scheme (i.e. entering into EBAs on terms without a royalty component), as: 

• Much of the Commissioner’s position and the opinions expressed by the expert witnesses called upon by both the Commissioner and PepsiCo were based on the assumption that payments for the concentrate included a component for royalties. However, there was no evidence (as concluded in the first issue) supporting the assumption that there was a royalty.

• Notwithstanding the IP was quantified and the parties were independent, there were no inquiries or analysis into the economic substance of the arrangement and the benefits to PepsiCo / SVC. At paragraph 51, the Judges stated that: 

In this case, the Commissioner’s scheme case begs the question of why the concentrate price should be understood as including a royalty. Establishing that the licence of the intellectual property was valuable is only half of the necessary inquiry. The missing other half involves the concentrate price and all of the other burdens and benefits flowing from the EBAs. 

On the basis that the payment for concentrate did consist of an embedded royalty, Justice Colvin concluded a tax benefit was obtained from entering into the EBAs, where a reasonable alternative postulate was for the royalty to be paid to PepsiCo/SVC as the owners IPs instead of the nominee.  

How SW can help 

Our experts can assist with assessing and advising how this ongoing tax case may affect your existing and prospective cross-border arrangements and proactively engage with the ATO to deal with potential disputes. 

Reach out to your SW advisor for support from our Corporate Tax team.  

Contributors

Antony Cheung 

The post ATO appeals to High Court after reversal of PepsiCo decision  appeared first on SW Accountants & Advisors.

On 12 February 2024, the Treasury released the revised exposure draft (ED) and explanatory materials (EM), collectively referred to as ‘Revised Draft Bill’, proposing to require certain large multinational enterprises (MNEs) to publicly report selected tax information on a country-by-country (CbC) basis. The amendments are proposed to be effective on or after 1 July 2024. 

The amendments builds on the original Draft Bill (April 2023 ED & EM) released as part of the 2022-23 Budget. Read more about our SW transfers pricing experts commentary on the initial announcement.

Key changes under the Revised Draft Bill include:

• a threshold has been established – the reporting obligation for CbC reporting parent is triggered only when the aggregated Australian sourced turnover reaches AUD $10 million for the income year
• disclosure requirements have been scaled back, removing specific items such as effective tax rate, list of intangible assets, and related party expenses
• information will be required on a CbC basis for Australia and specified jurisdictions (subject to ongoing update), and on either a CbC basis or an aggregated basis for the rest of the world.

Who is subject to reporting?

The reporting obligation applies to a CbC reporting parent of a CbC reporting group with an Australian presence (regardless whether it is Australian based or not). It is triggered only if the CbC reporting parent’s Australian-sourced aggregated turnover is AUD $10 million or more for the income year. If a CbC reporting parent’s reporting period is not an income year, it must assume the reporting period is an income year for calculating aggregated turnover.

What should be disclosed?

Under the Revised Draft Bill, a CbC reporting parent is required to publish selected tax information on a strictly CbC basis for Australia and specified jurisdictions, such as Hong Kong and Singapore, while allowing information to be provided on either a CbC basis or an aggregated basis for the rest of the world.

Selected tax information must be sourced from audited consolidated financial statements to ensure the information is reconcilable and verifiable. If not available, the information should reflect what would be shown in such statements had the entity been a listed company.

The below table compares information required under different regimes and summarises relevant information to be disclosed on a CbC basis or an aggregated basis.

A – Aggregated basis
C – CbC basis
★ – Not required under the existing confidential CbC Reporting regime
✤ – New requirements under the Revised Draft Bill

¹ CbC reporting parent is required to disclose the general information.

² Under the EU Directive, only the aggregated revenue needs to be reported, without separating unrelated party and related party revenues.

³ The Commissioner will receive the information in the approved form from the CbC reporting parent, and then make available on an Australian government website.

When is it due?

The Revised Draft Bill, once legislated, is expected to apply to reporting periods commencing on or after 1 July 2024. Submission of the public CbC report will be due no later than 12 months after the end of the relevant income year.

For example, for an entity with a reporting period ending on 31 December, the first reporting period would be 31 December 2025, with the report submission due by 31 December 2026.

The existing confidential CbC reporting obligations and the new public CbC reporting obligations will operate in parallel, but they are distinct and separate reporting regimes.

Penalties for non-compliance

Australian resident entities will be penalised for refusing or failing to comply with their obligation to publish the selected tax information.

A CbC reporting parent is liable to an administrative penalty if the entity fails to publish the required information (including information to correct a material error) on time.

The penalty is 500 penalty units ($156,500 based on the current rate of $313 per penalty unit) for each period of 28 late days or part thereof, up to a maximum of 2,500 penalty units (currently $782,500). Penalty units may increase in future.

How SW can help 

As Australia moves towards greater transparency in tax matters, it is important for MNEs, both Australian-headquartered and foreign-owned with Australian operations, to stay ahead of these changes. SW is committed to providing you with proactive support to navigate these complexities.

Our tax experts can assist with: 

• Impact assessment: Assessing the impact of public CbC reporting on your group.
• Approach planning: Advising on the strategic implications of the additional disclosure requirements (e.g. CbC reporting group’s approach to tax, reasoning for income tax accrued vs income tax due) in your unique circumstances, and helping you prepare for these disclosures.
• Compliance management: Developing and implementing a robust process to ensure seamless compliance with the reporting obligations, minimising the risk of penalties.
• Stakeholder communication: Facilitating effective communication with your foreign CbC reporting parent and other relevant stakeholders to enhance understanding/coordination within your group.

Please reach out to our expert team or your SW representative, if you would like to know more or need assistance.

Contributor

Rowena Ye

The post Revised draft for Australian public country-by-country reporting appeared first on SW Accountants & Advisors.

The government has introduced more amendments to the thin capitalisation and debt deduction creation rules Bill. While the changes to the Bill are positive, across our client base there are genuine third-party arrangements that will not satisfy the third-party debt test due to inadvertent technical breaches.

SW continues to work with industry bodies to highlight the impact to Treasury. We hope that further amendments will be made to the Bill to ensure it is a targeted and measured response to the issue of base erosion. 

Taxpayers will face a further period of uncertainty regarding how the law applies as the Bill has again been referred to a Senate Economics Committee due to report to parliament on 5 February 2024.

What can taxpayers do to prepare?

The focus has largely been on the amendments to the thin capitalisation rules due to its effective date. Our recap of the changes proposed in the Exposure draft can be found here.

However, taxpayers should start identifying the types of arrangements that could be impacted by the debt deduction creation rules as their material impact is arguably greater. The debt deduction creation rules commence on 1 July 2024 for all arrangements and include historical arrangements arising prior to the introduction of the rules.

What are the details of the rules? 

The original Bill and amendments are contained across separate documents. This means taxpayers will need to read each document collectively, which is no easy task.

To help you we have prepared a more detailed analysis of the Bill in our Technical Briefing. Our Technical Briefing summarises the application of the proposed law as well as the amendments to the original Bill. Due to the complexity of thin capitalisation, we encourage you to talk to our SW team.  

Summary of changes to the Bill

Below are the key changes between the original legislation, released on 22 June 2023 and the Senate amendments made on 29 November 2023:

How can SW help? 

Our experts can assist with: 

• modelling the potential impact of the new rules on your debt deductions 
• assessing the feasibility of restructuring the financing structure of the group 
• considering whether one of the alternative tests would be applicable and beneficial to your circumstances. 

Reach out to your SW advisor for support from our specialist tax team. Download the Technical Briefing for a deeper dive into the technical details.

Contributors

Kate Wittman

Ned Galloway

Ian Kearney

The post More thin capitalisation reforms – changes to Bill released appeared first on SW Accountants & Advisors.

Our online seminar was delivered in an interactive format with SW expert Daren Yeoh, Partner and Corporate & International Tax Director.

This seminar covered the following topics:

• Who will be impacted by Pillar Two
• When will Pillar Two apply in Australia
• Implications for Australian headquartered groups
• Implications for Australian subsidiaries and permanent establishments of foreign MNEs
• Steps to apply Pillar Two
• Implications for accounting for income taxes
• Simple calculation examples

SW Speaker

Daren Yeoh
Partner and Corporate & International Tax Director
SW 

Contact us

If you have any queries or would like more information, please contact the Marketing team via marketing@sw-au.com.

The post OECD Pillar Two GloBE rules – Global and domestic minimum tax seminar appeared first on SW Accountants & Advisors.