In the 2023-24 Budget, the Government announced the implementation of a 15 per cent global minimum tax and domestic minimum tax, key aspects of Pillar Two of the OECD/G20 Two-Pillar Solution to address the tax challenges arising from the digitalisation of the economy.

The Two-Pillar Solution will ensure that multinational enterprises (MNEs) will be subject to a minimum effective tax rate of 15%, and will re-allocate profit of the largest and most profitable MNEs to countries worldwide. Under the OECD, 136 countries and jurisdictions have agreed to implement the new framework and proposed reforms.

After years of joint development, members of the G20/Organization for Economic Co-operation and Development (OECD) Inclusive Framework (IF) on Base Erosion and Profit Shifting (BEPS) (the Inclusive Framework) agreed on the Two-Pillar Solution to address the Tax challenges arising from the Digitalization of the Economy. Two detailed blueprints were published in October 2022 on the tax reforms for addressing the Nexus and profit allocation challenges (Pillar One) and for Global Minimum Tax (GMT) rules (Pillar Two).

Who is affected?

Pillar One: will impact multinationals with revenues that exceed EUR 20b (~AUD 30b) per annum and have profit margins in ‘excess’ of 10%.

• Exclusions apply for extractives and regulated financial services
• Treasury currently estimates that no Australian headquartered multinationals would be impacted.  However Australian subsidiaries of foreign headquartered multinational groups may need to take into account any profits allocated to them in Australia.

Pillar Two: will have a far wider impact and applies to multinational groups with a global revenue of EUR 750m (~AUD 1.2b) per annum. 

• The OECD Framework excludes Government entities, international organisations (e.g. World Trade Organisation), non-profit organisations, pension funds or investment funds that are ultimate parent entities of an MNE Group or any holding vehicles used by such entities, organisations or funds from the scope of Pillar Two
• The OECD Framework includes de-minimis exemptions based on the revenue and profits within particular jurisdictions
• Further breakdown on each pillar can be found below.

When does it come into effect?

There is currently no draft legislation and no specified start date. However, it is expected that:

• Pillar One: the start date is to be announced.
• Pillar Two:
  • The Income Inclusion Rule which will apply for income years starting on or after 1 January 2024. This rule will apply to Australian multinationals and Australian entities which are subsidiaries of a foreign-headquartered multinational located in a jurisdiction that has not implemented this rule.
  • The Undertaxed Profits Rule which will apply for income years starting on or after 1 January 2025. Where no Income Inclusion Rule applies, the Undertaxed Profits Rule will apply to foreign multinationals that operate in Australia

How can SW help?

SW can help your business prepare for the international corporate tax reform, by assisting with the following: 

• Review of current corporate structure to determine if Pillar One and/or Pillar Two will apply
• Implement systems to assist with compliance with the new rules. 
• Formulate tax procedures and control framework to comply with the new rules.

If either, or both, Pillar One and Pillar Two are found to apply, we can provide the following services:

• Review bilateral tax treaties to determine if the STTR applies
• Model the impact of the rules
• Review transfer pricing agreements to determine risks and advise on changes to mitigate risks
• Determine where any remaining risks areas are and propose actions items to mitigate risks
• Lodge Global Anti-Base Erosion (GloBE) returns with the ATO.  This lodgement is likely to be required regardless of whether a top-up tax liability exists.

SW held a seminar to discuss the operation of the rules in greater details. you can access the webinar video here.

Key elements of the Two-Pillar Solution

Pillar One

Under Pillar One, MNEs will need to determine whether their profit margin (profit before tax ÷ revenue) exceeds 10%. The excess being referred to as “residual profits”.

A quarter of the residual profits would be redistributed to the countries where the products or services are consumed, to be taxed in those jurisdictions. The allocation of the residual profits to source jurisdictions will broadly be based on the revenue sourced from those jurisdictions. There will be some de-minimis exclusions.

What are the key implications for affected taxpayers?

• Systems and processes should be implemented to meet this compliance requirement
• Subsidiaries based in Australia may need to consider any profits allocated to Australia before finalisation of their income tax returns
• Global transfer pricing policies will need to be reviewed in light of the new rules
• The tax impact should be modelled.

Pillar Two

Pillar Two is also referred to as the Global Anti-Base Erosion or Global Minimum Tax rules.

Objectives of Pillar Two

The objective of Pillar Two is to set a minimum Effective Tax Rate (ETR) to reduce incentives for multinational to move profits to low tax jurisdictions.

Calculating the ETR

• The ETR is not the corporate tax rate in the country. It is similar to how the effective tax rate is calculated under the accounting rules but will not be the same as the calculation required under the Pillar Two rules.  
• The ETR = Adjusted Covered Taxes ÷ Net GloBE Income. The minimum ETR is 15% and is calculated on a jurisdictional basis.
• The financial accounts and tax effect accounting balances will be used in the calculation of the ETR to better align the financial accounts with tax purposes. The net GloBE income will generally be the accounting profits used in the parent entity’s consolidated financial statements subject to certain adjustments (see below).
• In calculating the net GloBE income, there will be some adjustments for certain permanent differences such as removing dividends and equity gains. The OECD framework also includes an exclusion for international shipping income.
• In calculating the net covered taxes, only tax on profits are relevant. Indirect taxes are excluded. Further, there are rules for addressing temporary differences. Therefore, the tax effect accounting workpapers will be relevant in calculating the ETR.
• Tax losses brought forward can broadly be carried forward and applied in the calculations.
• There are also adjustments to Net Globe Income based on the level of employment costs and tangible assets in each jurisdiction.  This would reduce the profits subject to the top-up tax.
• As the calculations are complicated, SW will hold seminars when the legislation is released to discuss the operation of the rules in greater detail.
• If subsidiaries in a jurisdiction have an effective tax rate of <15% (say 10%), then the parent entity jurisdiction can levy a “top-up” tax of the difference i.e. 5% (15%-10%) on the relevant profits in the jurisdiction. This is referred to as the Income Inclusion Rule (IIR). This tax is in addition to the tax paid by the parent company on its own profits.
• Where the top-up tax amount is not fully covered by the IIR, then the Undertaxed Payment Rule (UTPR) will operate as a stop gap measure. In general, the remaining top-up tax will be allocated to the all the jurisdictions (in which the MNE operates) which have implemented the GloBE rules.
• Before calculating the IIR and UTPR, the Subject To Tax Rule (STTR) must firstly be considered. The STTR prevents companies from avoiding tax on their profit earned in developing countries by making deductible payments such as interest or royalties that benefit from reduced withholding tax rates under tax treaties and which are not taxed (or taxed at a low rate) under the tax laws in the treaty partner. In this case, the payer’s jurisdiction can levy an additional top-up withholding tax so that the income amount is subject to a minimum tax (in both countries together) of 9%. This is lower than the minimum 15% tax on profits because the STTR tax is calculated based on the gross amount.

Operation of Pillar Two

Step 1. Subject to tax rule (STTR)

Objective: Ensure that developing countries have an equal opportunity to tax certain types of income.

Implementation:

• Participating members who are taxing certain items of income below 9% will be required to include the STTR into a bilateral tax treaty when requested by a developing treaty partner.
• When the STTRs are included in a bilateral tax treaty, the payer jurisdiction may additionally tax certain related party payments if the receipt is taxed at a rate of less than 9% in the payee’s jurisdiction.
• This taxing right will be capped at the difference between the STTR minimum tax rate and the tax rate on the payment.

Impact on Australian taxpayers

The STTR is expected to have limited application to Australian taxpayers given our corporate tax rate and withholding tax system.  However, this will need to be monitored to confirm that affected payments have been subject to the minimum 9% tax.

Step 2. IIR and UTPR

Once the STTR has been considered, the next step is to consider the IIR and UTPR rules.

Objective: Ensure an effective minimum 15% effective rate is imposed on multinationals with a global revenue of EUR 750 million (~AUD 1.2 billion) per annum. 

Implementation: These rules would be carried out through two interlocking rules. Together they would work to collect a top-up tax on profits in jurisdictions which are deemed to be ‘undertaxed’.

• Income inclusion rule (IIR) – is the primary charging mechanism which would allow the parent company jurisdiction to apply a top-up tax on resident multinational ‘parent’ companies, where the group’s income in another jurisdiction is being taxed below the global minimum rate of 15%. Note that there are special rules applying to overseas branches of the parent company which operate differently to the IIR.
• Undertaxed payments rule (UTPR) – where the parent company jurisdiction does not implement the IIR or the top-top up tax is not fully captured by the IIR, then the UTPR as the secondary charging mechanism would broadly allocate the remaining top-up tax to all the implementing jurisdictions in which the MNE operates.
• For example, if a multinational subsidiary in Australia had a foreign subsidiary paying less than the global minimum rate on its profits, and there was no foreign jurisdiction applying the IIR in relation to those profits, then Australia may be required to apply the UTPR to the Australian subsidiary in respect of the under-taxation in the foreign subsidiary’s jurisdiction. 

How can affected taxpayers prepare?

• Systems and processes will need to be implemented to allow for an effective and efficient calculation of the effective tax rates and completion of the GloBE information return
• The impact on the MNE group should be modelled
• Review current transfer pricing agreements to determine how they would be impacted by Pillar One and Pillar Two.

Contributors

Kate Wittman

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The Exposure Draft Bill (the draft Bill), released on 31 March 2023, proposes a new anti-avoidance rule to deny deductions for payments attributed to intangible assets located in low corporate tax jurisdictions. Significantly, the changes do not remove withholding tax from affected payments that are classed as royalties. In some circumstances, payments may therefore be both non-deductible, and subject to Australian withholding tax at rates of up to 30%.

The changes will apply to payments made by significant global entities (SGEs) on or after 1 July 2023. Broadly, SGEs are members of multinational groups with annual consolidated global income of at least AUD 1 billion. The proposed 1 July 2023 start date allows little time to prepare for the impact of the proposed changes.

The draft Bill is one of several measures introduced in the 2022-23 Federal Budget as part of a comprehensive strategy to enhance multinational enterprises’ tax integrity.

Anti-avoidance rule changes

The statutory objective is to discourage SGEs from avoiding income tax by channeling income from the exploitation of intangible assets to low corporate tax jurisdictions. The proposed rule will apply to payments:

• made by SGEs
• in relation to an arrangement where the SGE or an associate acquires or exploits the intangible asset
• where the arrangement results in the recipient (or another associate) generating income in a jurisdiction with low taxes.

A jurisdiction will be classed as a ‘low corporate tax jurisdiction’ if the corporate tax rate is less than 15%.

The rules are also intended to encompass the incurring of a liability or crediting of an amount, without an actual direct royalty payment. This ensures the proposed rules cannot be evaded through indirect payments.

Intangible assets payments

As expected, the proposed law applies to relevant payments made by an SGE directly or indirectly to an associate.

Payments made directly to unrelated third parties are not within the scope of the proposed law unless they are otherwise also indirect payments to an associate.

General definition of intangible assets

In general, the term ‘intangible asset’ is interpreted according to its ordinary meaning. However, the draft Bill proposes an additional definition.

The proposed rules will utilise some of the existing definitions of ‘royalty’ in the current tax legislation, with respect to the use or supply of specific assets. Some examples are:

• intellectual property rights such as trademarks, patents, designs and processes
• knowledge and information pertaining to certain fields such as science, technical and commercial
• in house designed algorithms
• any tapes, visual images or sounds used for broadcasting
• motion picture films.

The proposed definition of intangible asset also encompasses rights or interests in the type of assets mentioned above.  Additionally, further assets may be specified in the regulations.

The proposed rule does not extend to rights related to tangible assets, such as interests in land, or to financial arrangements (as defined in the existing tax legislation). The exclusion from categorisation as intangible assets equally applies to industrial, commercial, or scientific equipment. 

Apportionment

The phrase, ‘to the extent’ in the proposed law contemplates payments of an undissected amount for a bundle of rights or benefits. Apportionment may then be required to allocate part of the payment as relating to the intangible assets. The deduction for that portion of the payment would then be denied.

Several transfer pricing methodologies may be used to apportion payments, however the proposed law is yet to provide guidance on how such apportionment should occur. This appears similar to the potential uncertainty on apportionment of income received in respect of software (albeit relevant to withholding tax).

Low corporate tax jurisdictions

The draft Bill defines a ‘low corporate tax jurisdiction’ as a country in which the lowest corporate income tax rate applicable to an SGE is below 15%. Determining the ‘lowest corporate income tax rate’ of a country may be a complex matter.

Of concern is the fact that jurisdictions which provide tax exemptions for specific types of income may be classed as low tax jurisdictions due to the broad scope of this definition. A country such as New Zealand, which does not generally tax capital gains, may be classed as a low corporate tax jurisdiction.

A Government Minister can also determine that a jurisdiction qualifies as low tax if it has a preferential patent box regime.  This provision is only intended to capture patent box regimes that provide concessional tax treatment without requiring any economic activity to develop the relevant intellectual property in the country providing the patent box treatment.

In making a determination, the Minister may have regard to publications of the Organisation for Economic Co-operation and Development (OECD).

The suggested tax threshold aligns with the global trend towards a domestic minimum tax (DMT) rate of 15% as proposed under the OECD’s Global Anti-Base Erosion (GloBE) Pillar Two initiative. Nonetheless, it exceeds the existing minimum royalty withholding rate of 10% commonly found in Australia’s double taxation agreements. Furthermore, the proposed rate is higher than the 10% rate stipulated in the equivalent legislation of the United Kingdom.

Exploitation of intangible assets

The draft Bill introduces an innovative concept in defining intangible assets to be ‘exploited’. This concept encompasses a wide range of arrangements that go beyond the mere use of the asset. Examples include the use by way of marketing, selling, licensing, distributing, supplying, or engaging in any other activity with the intangible asset. This expanded definition of ‘exploitation’ aims to cover a broad spectrum of arrangements, highlighting the comprehensive scope of activities that may be captured.

The condition will also be deemed as fulfilled if the SGE is granted explicit authorisation to utilise the intangible asset. According to the draft Explanatory Materials, as long as there is a mutual understanding between the parties that allows the SGE to access and utilise the intangible asset, this requirement will be considered met. It should be noted that this condition can still be satisfied even if the permission is not explicitly documented.

The broad definition of ‘exploit’ implies that the threshold for meeting this requirement is relatively low, which means that even ordinary commercial arrangements could potentially fall within its scope. Taxpayers will need to carefully assess the application of the other conditions to determine if the provisions are applicable in their specific situation.

SGE penalties

The Government is also requesting stakeholder views regarding the appropriateness of a shortfall penalty provision to be imposed on SGEs which mischaracterise payments in an attempt to avoid income tax, including withholding tax. Given the onerous penalty regime that already applies to SGEs, the introduction of further specific penalties under the intangible payments rules would seem to be excessive.

How SW can help

Our tax experts can assist with

• analysing arrangements referrable to the use of intellectual property and the likelihood of the measures applying to denied deductions
• analysing the substance of payments, including the extent of apportionment required to determine the part attributable to a right to exploit an intangible asset
• assessing the extent of income from exploiting intangible assets that is derived in a low corporate tax jurisdiction.

SW will be monitoring announcements and will keep you updated as more information becomes available.

Please reach out to the Key Contacts here or your SW contact if you would like assistance determining the impact of the measures on your group, and advice on how your group can navigate the complexities.

Contributors

Tony Principe

Wasi Hussain

Rahul Sanghani

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Chris brings a diverse background in accounting, advisory and financial services which allows him to provide family wide holistic solutions for collaborative investment, asset allocation and structuring for complex family groups.

Chris’ clients value how reliable and dependable he is in delivering work for them. Chris takes the time to build trust and confidence with his clients so that he can tailor his service delivery to suit each individual client. As a result of adapting to his client’s preferences and always putting them first, Chris was nominated as a finalist in the beaton Client Choice Awards for Best Accountant.

Career highlights:

• Developing simple and complex financial strategies to help clients achieve their goals
• Providing advice on both managing and growing family wealth to investors small and large
• Helping SME clients develop strategies to transition business wealth to personal wealth and also transitioning that wealth between generations.

Chris is a Partner of SW Audit and a Director of SW Accountants & Advisors Pty Ltd.

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He primarily acts for large, complex private groups and ASX listed entities and is recognised as a leading expert on Division 7A and the taxation of trusts.

Ian has served on the Australian Tax Office (ATO) National Tax Liaison Group and also on the NTLG Trust Sub-Group. He actively participates in consultation processes with the Department of Treasury in relation to new or proposed tax legislation which may affect the Firm’s clients.

Ian’s experience includes:

• Providing strategic tax advice in relation to M&A transactions, including significant domestic and international property transactions
• Advising on tax implications of corporate restructures

Successfully dealing and negotiating with the ATO in relation to technical issues, private ruling requests, management of complex tax audits and reviews of clients’ affairs.

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Vincent has over 12 years’ experience in providing accounting and taxation advice to the multinational and domestic, listed and private companies.

Vincent brings a well-rounded skill set to his client engagements, combining accounting and tax advice with strategic and commercial consulting. He has acted for a wide range of clients including large private and publicly listed groups from across mining, property and construction, investment and funds management, energy & resources, manufacturing, pharmaceuticals & life sciences, hospitality, agriculture and retail sectors.

He plays a number of roles with his clients and offers to clients includes advice to personal, business and special purpose entities on a range of accounting, consulting and tax issues. Vincent has lengthy experience working with Chinese owned and invested groups including subsidiaries of Chinese SOE or POEs which include some of the largest investments that China has made into Australia.

Speaking fluent English and Mandarin, Vincent is uniquely positioned to understand and translate the needs of his clients to ensure their goals are met.

Vincent is a Partner of SW Audit and a Director of SW Accountants & Advisors Pty Ltd.

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Steve specialises in establishing overseas education campuses, financing solutions, developing innovative business models and governance and performance reviews.

Steve has worked with 35 of the 40 major Australian Universities during his career. He has strong relationships and is viewed as a trusted advisor in the sector.

For the past 12 years, Steve has assisted organisations in the education sector with the challenges associated with:

• Budgeting and international student projections
• Business Plans for the expansion of an organisation’s educational offerings
• Business analytics and trend analysis across educational KPIs 
• Divestments, mergers and acquisitions of education providers
• Structuring entities tax effectively
• Course and staff rationalisation assignments
• Grant and funding application
• Ownership structures where premises owned by education provider.

Steve has also undertaken assignments for the State Government in respect of trends in education earnings of providers has assisted in undertaking GST, FBT and Taxation health checks for a range of education providers.

Steve is a Partner of SW Audit and a Director of SW Accountants & Advisors Pty Ltd.

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Simon joined SW in 2007 following four and a half years working in the Australian Taxation Office (ATO). During his time at the ATO Simon developed deep expertise in international tax issues, and as a result, became responsible for several high profile audits dealing with foreign structuring. Simon has developed a high degree of familiarity with the ATO’s audit and dispute resolution process and has an insider’s understanding of the ATO’s information gathering powers, having exercised such powers first-hand. This experience has been invaluable to a number of Simon’s clients who have been subject to various degrees of ATO audit and examination.

Simon is the leader of the SW’s Financial Services Industry Group and has accordingly worked extensively with our financial services clients, including ASX listed and unlisted funds, fund managers, financial services platform operators, insurance providers and Insurance brokers.

Notwithstanding Simon’s breadth of tax and commercial knowledge, he has a particular client focus on corporate international tax, and regularly advises clients on issues dealing with the application of controlled foreign company rules, thin capitalisation, and the operation of Australia’s double tax treaty network. Simon’s depth of knowledge in this area is well known in the industry, having been published on several occasions for articles written in relation to Australian international tax.

Simon has worked with numerous listed and unlisted corporate tax clients in the property funds management, manufacturing and mining industries. Consequently Simon has developed significant tax effect accounting expertise, allowing him to assist in the development of the firm’s Complete Tax Solutions (CTS) software and, more importantly, work collaboratively with clients to deliver on their year-end reporting obligations.

Simon is a Partner of SW Audit and a Director of SW Accountants & Advisors Pty Ltd.

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Her clients are engaged in professional services, wholesale importing, not-for-profit organisations, IT, property development and investment.

Sharon has developed expertise in providing outsourcing services for start-up companies, major property developers and the Australian subsidiaries of multinational groups.

Sharon’s clients know that she is responsive and personable, and prepared to take the time to understand their business and any particular taxation, finance or industry issue they are facing.

Sharon can provide specialist advice on Goods and Services Tax (GST), Fringe Benefit Tax (FBT) and salary packaging. She can advise clients on their risk for indirect tax compliance, payroll tax and workcover for employees and contractor arrangements. Sharon can provide financial analysis and management reporting, financial modelling and business structuring.

Sharon is a Certified Tax Adviser with the Taxation Institute of Australia, a member of the Institute of Chartered Accountants and Treasurer of Women in Finance Victoria.

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Matthew has built a successful career in providing business and tax advice to high net wealth family group and leads our Family Office team. Matthew is passionate about philanthropic activities and works with his clients to assist them manage the financial and governance aspects of their grant making.

He also leads our Corporate Social Responsibility Committee, Co2. which engages with our staff, local communities and the wider world including our environment to have a positive impact.

Matthew’s experience includes:

• Managing tax and accounting requirement for clients
• Connecting his clients with a broad range of professionals who add value to their business interests, including stockbrokers and property agents
• Working closely with our Wealth Management team to enable a full service offering for our high net wealth families
• Holding directorships, trusteeships and secretarial positions in private companies and not-for-profits
• Succession and estate planning.

Matthew is a Partner of SW Audit and a Director of SW Accountants & Advisors Pty Ltd.

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Leo has extensive experience in Mergers & Acquisitions, tax structuring, consolidation and cross border financing etc. across a number of industries including natural resources, property and agriculture.

He has acted for a wide range of clients including State owned Entities (SOE), publicly listed groups and Privately owned Entities (POE).

He is fluent in both English and Mandarin.

Leo’s experience includes:

• Providing strategic tax advice and solutions for Australian local and international business;
• International tax structuring and tax due diligence on inbound and outbound acquisitions;
• Providing tax advice and dealing with the ATO in respect of complex tax matters such as tax consolidation, thin capitalisation, tax losses recoupment, capital gains tax, withholding taxes.
• Australian tax compliance & tax effect accounting.
• Presenting regularly on Australian/International tax updates.

Leo is a Partner of SW Audit and a Director of SW Accountants & Advisors Pty Ltd.

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