‘A lot of work’ and little time for Pillar Two reporting
Australia has been slow to legislate the OECD’s multinational tax rules, but policymakers aren’t extending the same grace to reporting entities.
Despite trailing the pack in drafting Pillar Two legislation, policymakers are expecting multinationals to hit the ground running.
The multinational reporting landscape is set to get even more complicated and costly as the OECD’s Base Erosion and Profit Shifting (BEPS) Pillar Two Model Rules continue to be rolled out with jurisdictional variations.
More than 135 countries agreed to the rules, though not all have taken steps towards implementing them. While over 30 countries have enacted Pillar Two legislation domestically – a charge led by the UK, Japan, and South Korea – Australia is yet to enact its draft legislation.
“Australia is behind the pack,” said Nadine Redford, associate partner in international tax at EY. However, after a “really short” consultation period following the government’s release of draft Pillar Two legislation, it is “full steam ahead” for reporting entities that will be required to meet a retrospective start date of 1 January 2024.
Redford said entities should be thinking of these rules as already implemented, just like any other tax. Even once implemented, the rules were specially designed to sit within a piece of subordinate legislation, meaning they can be more easily updated than primary legislation.
While transitional safe harbours will allow eligible entities to conduct shortcut calculations over the first three reporting years, reporting requirements will be more or less unchanged.
According to Redford, the new rules are spread across multiple documents over 1,000 pages. Though they will eventually be compiled into one document, this will likely take many years.
Fortunately, Australia’s rules are largely compliant with the OECD’s guidance, meaning entities will not have to make as many adjustments as certain other jurisdictions.
The new returns for Australian-located entities part of an in-scope multinational group – including, domestic minimum tax (DMT), income inclusion rules (IIR), and undertaxed profits rule (UTPR) – will not be due until 15 months post-year-end (September 2026).
“This is quite a way off, but a lot of work needs to be done,” said Redford, adding that the priority should be figuring out what to include in financial statements in the short term.
Entities should also be considering how they can benefit from transitional safe harbours, using country-by-country reporting data to support shortcut calculations.
The main question entities should be asking themselves is how best to delegate responsibility among global tax teams. Redford recommended that data should be collected by a central, international team and pushed out to local teams.
Treasury recently released a consultation paper which outlined how the new reporting rules will interact with Australia’s income tax laws. Key takeaways include the following:
- Top-up tax paid under DMT rules will give rise to franking credits but not under IIR or the UTPR
- Hybrid mismatch rules and foreign hybrid entity rules will remain in place even where a foreign jurisdiction imposes global or domestic minimum taxes
- Foreign income tax offsets (FITO) may arise from taxes imposed under qualified domestic minimum top-up taxe (QDMTT) but not foreign IRR or UTPR
