Treasury releases draft minimum tax rules for multinationals
Designed to meet Australia’s Pillar Two commitments, Treasury’s exposure draft considers how multinational top-up taxes will interact with existing foreign income tax rules.
Treasury has released an exposure draft of its proposed minimum multinational tax legislation as part of its Pillar Two commitments.
The proposal acts on a budget commitment to introduce a mandatory global and domestic tax of at least 15 per cent for multinationals with global revenues of $1.2 billion and above.
Assistant Treasury Minister Andrew Leigh said the draft legislation is part of a “global effort to prevent a race to the bottom on corporate income tax.”
The proposed legislation will place Australia “among the lead jurisdictions” implementing the OECD Two-Pillar Solution, he said.
According to the OECD, the minimum taxes are expected to generate an additional $220 billion in tax revenue globally.
In a complementary discussion paper, Treasury said the domestic minimum tax rates of a foreign jurisdiction will, in some circumstances, take precedence over Australia’s income tax laws.
It added, however, that Australian income tax laws are to be applied before the application of the minimum taxes.
“We would expect that a taxpayer will calculate their regular income tax liability and subsequently calculate any global or domestic minimum tax liability,” it said.
The discussion paper requested public feedback on the interaction between the new laws and existing instruments including those relating to hybrid mismatch rules, foreign hybrid entity rules, foreign income tax offsets, and controlled foreign company rules.
Treasury said it believes the hybrid mismatch rules and foreign hybrid entity rules should continue operating regardless of whether a foreign jurisdiction imposes minimum taxes.
Further, a foreign-qualified domestic minimum tax could give rise to a foreign income tax offset, but that taxes imposed under a foreign IIR or UTPR will not.
It added that Australia’s CFC rules should not provide a notional allowable deduction for taxes paid under IIR or UTPR, but that they should in relation to domestic minimum taxes.
The exposure draft proposed three bills. The first, referred to as the “Imposition Bill”, imposes three top-up taxes – a domestic top-up tax, an Income Inclusion Rule (IIR) top-up tax, and an Undertaxed Profits Rules (UTPR) top-up tax.
Unlike traditional taxes, top-up taxes only apply where an entity fails to meet the required minimum tax. In this case, that is the 15 per cent minimum domestic and global tax rate.
The domestic and IIR top-up taxes will apply to fiscal years beginning after 1 January 2024, while the UTPR tax will affect fiscal years beginning after 1 January 2025.
As noted in the exposure draft, the reforms are designed to ensure relevant multinationals have an effective tax rate of at least 15 per cent in each jurisdiction in which they operate.
The second bill, referred to as the “Assessment Bill”, implements the framework through which the top-up taxes will be enforced, while the third, the “Consequential Bill”, contains complimentary provisions for the administration of the taxes.
All members of the OECD-G20 Inclusive Framework on Base Erosion and Profit Shifting have committed to introducing global and domestic multinational minimum taxes.
The framework consists of two pillars – the first relates to income reallocations and transfer pricing arrangements, while the minimum tax rate makes up Pillar Two.
The minimum tax rules complement multinational debt deduction and transparency legislation currently before Parliament.
The taxes are part of a “coordinated global approach by the OECD to put a floor on tax competition and establish a fairer domestic and international tax system,” said Leigh.
“An international tax system where big multinationals pay their fair share is better for small businesses, better for taxpayers, and better for the economy,” he added.
