As part of the 23/24 Federal Budget the Government announced it will implement key aspects of the “Pillar Two” solution with a view to addressing the tax challenges arising from digitalisation of the economy.  The rules will apply to entities who are part of groups that have an annual global revenue of EUR750 million (approximately $1.2 billion).  This means that small Australian companies that are part of a large multinational group may be subject to the rules.

The proposed changes that are to take effect can be summarised as follows:

• 15% global minimum tax for large multinational enterprises with the
• Income Inclusion Rule applying to income years starting on or after 1 January 2024; and
• Undertaxed Profits Rule applying to income years starting on or after 1 January 2025.
• 15% global domestic minimum tax applying to income years starting on or after 1 January 2024.

The proposed approach is that the GMT and DMT will be based on the OECD model rules, which are designed to ensure large multinationals pay an effective minimum level of tax on the income arising in each jurisdiction where they operate.

The GMT rules would allow Australia to apply a top up tax on a resident multinational parent or subsidiary company where the group’s income is taxed below 15% overseas.

A DMT would give Australia first claim on top-up tax for any low-taxed domestic income. For example, a large multinational company’s effective Australian tax rate may fall below 15% in certain circumstances. In these instances, the DMT applies so that Australia collects the revenue that would otherwise have been collected by another country’s GMT.

The OCED are in the process of developing an Information Return to enable Australian headquartered multinationals to lodge any arising top-up tax liabilities payable in Australia to the ATO.

Subsidiaries of overseas groups should continue to monitor the proposed changes as they may find themselves in the unwelcome position of a GMT or DMT charge which will mean no change in their entities direct profile or tax attributes.

Should you have concerns or questions on how this may impact you please reach out to your ESV Engagement Partner.