Multinationals should be acting on base erosion sooner, not later
Despite the uncertainty surrounding Australia’s pillar two approach, KPMG said multinationals should be preparing now.
Australia's pillar two draft legislation is expected to be released soon, but KPMG's Tax Now podcast said enough information is available for businesses to begin crafting their approach now.
In January, the OECD estimated that 90 per cent of all in-scope multinational enterprises will be subject to a global minimum tax by 2025 – adding up to US$192 billion per year in global corporate income tax revenues.
Two-thirds of the additional global tax revenue will come from top-up taxes – which are levied to bring the total amount of taxes paid on a multinationals’ excess profit in a jurisdiction to at least 15 per cent – with the remainder coming from reduced losses to profit-shifting, said the OECD.
To date, most EU countries substantially enacted legislation last year, though a few – including Greece, Spain, and Portugal have yet to do so.
Subject to an EU directive, however, all will be required to enforce a 2024 start date for income inclusion rules (IIR) and a 2025 start date for undertaxed payments rules, said KPMG Tax Now.
Though Australia has yet to release its draft legislation, Treasury has signaled that it will largely comply with the OECD model rules, said Alia Lum, KMPG tax policy lead.
In the Asia-Pacific region, Japan, Korea, and Vietnam have all implemented IIR legislation effective from 2024. Malaysia, Hong Kong, and Singapore’s IIR legislation will come into effect in 2024 along with some domestic minimum to-up taxes.
Mandatory disclosure requirements in accounting standards for pillar two changes, including qualified domestic top up taxes come into effect from when a jurisdiction substantively enacts those rules, said KPMG.
“Say you’re an Australian-headquartered group with operations in Singapore and the UK,” said Lum.
“Once you get to the 30 June 2024 year-end accounts, there may be more detailed disclosures required, including qualitative and quantitative information on pillar two exposure,” said Lum.
If Australia enacts or substantially enacts its legislation by that date, then MNEs will need to estimate the entire groups exposure, she said. If not, then exposure estimates need to be calculated only for those jurisdictions that have substantially enacted a qualified domestic top-up tax, such as the UK.
“Keep in mind, when you’re looking at substantive enactment, it doesn’t matter whether the country has announced a 2024 start date or a 2024 start date,” said Lum, who explained that pre-regime disclosures will be triggered upon substantive enactment.
Foreign-owned Australian groups will not be bound by any mandatory disclosure requirements for pillar two until substantial legislative enactment of the Australian rules. However, Lum said auditors are encouraging optional disclosures.
Ahead of Australia’s draft legislation, Lum added that organisations should be taking the following actions.
Firstly, groups should be classifying their entities under Global Anti-Base Erosion (GLoBE) rules. Secondly, groups should be running transitional safe harbour calculations, and thirdly, they should be modelling their material high-risk jurisdictions.
“You shouldn’t just assume that you will satisfy the transitional country-by-country safe harbours for those first three years just because you’ve got a high headline tax rate,” said Lum.
“Things like unrecognised DTAs, CFC taxes, and large prior-year adjustments could cause you to fail.”
Should a transitional country-by-country safe harbour arrangement fail, that transitional safe harbour cannot be relied on in future years.
Lum said groups should be investing in detailed pre-regime impact assessments for key jurisdictions as well as those where they have failed the transitional safe harbour.
KPMG international tax manager Lydia Morris said questions remain regarding the application of the rules to mergers and acquisitions.
For instance, it is yet unclear how pillar two will operate alongside Australia’s tax consolidation regime in relation to the “step-up in the accounting value of assets and liabilities of a target following acquisition.”
“We’re hoping this will be clarified in the domestic pillar two legislation,” said Morris.
Further OECD guidance on pillar two compliance is expected to be released shortly.
