A global minimum tax and domestic minimum tax will be introduced to ensure large multinationals pay an effective minimum level of tax in each jurisdiction in which they operate.
A global minimum corporate tax rate of 15 per cent will be applied to large Multinational Enterprises (MNEs) with annual global revenue of EUR750million (approximately AUD 1.2billion ) or more. The global minimum tax rules will allow Australia to apply a top-up tax on an Australian parent or subsidiary company where the group’s income is taxed below 15 per cent overseas. It is expected that any top-up tax paid by Australian companies on their low-taxed foreign subsidiaries will not give rise to credits to the company’s franking account.
The complementary domestic minimum tax would give Australia first claim on top-up tax for any low-taxed domestic income. If a large multinational company’s effective Australian tax rate falls below 15 per cent, the domestic minimum tax would allow Australia to collect the top-up tax that would otherwise have been collected by another country’s global minimum tax rules. In contrast to the global minimum tax, it is expected that any top-up tax paid by Australian companies under the domestic minimum tax measure will result in credits to the company’s franking account.
The global minimum tax and domestic minimum tax measures are key aspects of Pillar Two of the OECD’s Two-Pillar Solution to address the tax challenges arising from the digitalisation of the economy. These rules will likely impact Australian companies that are already subject to Country-by-Country Reporting obligations and are expected to apply for income years beginning on or after 1 January 2024.
An undertaxed payment rule will also be implemented for income years beginning on or after 1 January 2025. This rule complements the global minimum tax rule in situations where no country collects the top-up tax. The top-up tax will instead be allocated between countries in which the multinational group makes deductible payments to low-taxed jurisdictions.
For entities that are an MNE, changes to systems and the costs associated with the implementation of Pillar Two are expected to be significant. Entities operating in multiple jurisdictions will need to be able to access appropriate worldwide tax data to ensure that they can properly calculate a global minimum tax rate, a domestic minimum tax rate and the allocation of an underpayments rule. With the proposed application date just around the corner, MNEs should be acting now to assess their financial and operational models for their global enterprises.