Introduction
The first part of this meeting is the carry-over of on joint ventures form the 6 March 2025 meeting.
The main discussion was centred around written feedback received from members earlier in the year in response to the subordinate legislation with most of the time spent on tax consolidation and the transitional country by country reporting safe harbour.
Tax Consolidation
Lodgment obligations
The project team provided an update on the Pillar Two lodgment obligations for tax consolidated groups (TCG) and multiple entry consolidated (MEC) groups.
Feedback was sought on the nature of guidance needed to support taxpayers' understanding of the treatment of specific entities/groups.
To inform our administrative design, we are interested in the industry experience regarding operation of the Pillar Two lodgment and payment legislative provisions as they apply to TCG and MEC groups.
Calculation and allocation of top-up tax
We delivered a general description of the calculation and allocation of top-up tax (TuT) with a focus on the practical application of the Constituent Entity (CE) calculations of GloBE income and taxes and the allocation of top-up taxes in terms of MNE accounting systems.
The project team discussed the special rule for consolidated groups regarding the allocation of TuT. According to legal requirements, TuT for each CE in the TCG must be calculated and then allocated to the head company of the TCG which will be the liable entity for payment of the top-up tax amount.
In practice, the jurisdictional TuT amount remains the same whether it is allocated to the head company of the TCG or other CEs in Australia. We asked members if this legal requirement to calculate the TuT for each CE, including subsidiary members, raises any issues.
Members were asked if they had any feedback in terms of MNEs systems, simplifications or data requirements for TCGs in respect of special rules in the allocation of top-up taxes for consolidated groups.
We also want to understand if the bottom-up approach (a CE by CE approach) required under subordinate legislation causes any practical compliance or data gathering issues, and how common this issue is in context of those MNE groups that use a top-down approach, where the financial data is computed at a consolidated level, to determine income and taxes of members of the TCG, that is, their systems are designed to treat the TCG as a single entity.
Members observed that if an election is made to apply consolidated accounting treatment, then the top-down approach is preferred as it likely aligns with the MNE's reporting system. These MNEs that use top-down approach would have further administrative and compliance burden if the requirement is to determine GloBE income of each entity on entity-by-entity basis for purpose of determining top-up tax of CE that is ultimately payable by the head of TCG. A proposal was made by a member that the ATO allow use to top-down approach to calculate income and taxes of head of TCG as single entity rather than mandating use of bottom-up approach.
As part of this discussion, members suggested a potential amendment to the subordinate legislation to permit the use of a top-down approach, effectively treating the TCG as a single entity. This feedback will be communicated to Treasury. We were also asked to consider ATO practical compliance approach where the top-down approach is used, considering the impact on the allocation, rather than the quantum, of top-up tax collection.
Election to apply consolidated treatment
This topic discussed the section 3-200 election available to apply consolidated accounting treatment for transactions between entities located in the same jurisdiction and part of a tax consolidated group.
An ultimate parent entity (UPE) may make a 5-year election to apply its consolidated accounting treatment to eliminate income, expenses, gains, and losses from transactions between entities provided they are in a TCG and all located in the same jurisdiction.
Members were asked to provide feedback on systems, data and compliance simplification in relation to this election.
Aggregate reporting election and transitional simplified jurisdictional reporting election
The project team provided an overview of the aggregate reporting election in which an MNE group that has CEs that are in a TCG may elect to be treated as a single CE for the purposes of reporting disclosures in the GloBE information return (GIR) if certain requirements are met.
This election is available in the GIR. As Australia's legislation will require lodgment of a GIR as agreed by GloBE Implementation Framework, this election is also available in line with the scope of the election noted in the GIR issued by Organisation for Economic Co-operation and Development.
The project team provided an overview of election for transitional simplified jurisdictional reporting contained in the GIR where computations for eligible groups can be disclosed in the GIR on a jurisdictional basis rather than on a CE-by-CE basis, during a transition period.
Members were asked to provide feedback in relation to systems, data and compliance simplification for the election to apply the aggregated reporting election and the transitional simplified jurisdictional reporting election.
Several members suggested consideration be made concerning MEC groups on the use/availability of transitional simplified jurisdictional reporting election and aggregate reporting election as well as when detailed CE by CE reporting if required.
Transfer of ownership interest
The working group was presented with the treatment of transactions where a target company joins an Australian tax consolidated group due to a third-party acquisition.
The ATO discussed the application of section 6-30 to the transaction, which has implications for how the target's identifiable assets and liabilities are recorded. Also discussed with the group, the application of the rule to transactions occurring both before and after the transitional year, setting the cost attributes of assets and deferred tax assets (DTA) at the transition year and subsequent years. The exception for transactions before 31 December 2021 subject to certain limitations was also raised with the group.
A walk through of the rules and guidance on the calculation of deferred tax assets on transfers of ownership interest was provided. The session detailed different rules on the generation and use of deferred tax assets depending on when the relevant transaction occurred, features of the transaction and whether specific integrity rules might apply.
Some integrity rules contained in Chapter 9 of the Model Rules and Chapter 9 of Australia's subordinate legislation might apply to disregard deferred tax assets for certain transactions entered into prior to the transitional year. We shared some examples where the integrity rules may not apply for certain transactions entered into by members of TCG and where there is some uncertainty whether some transactions could be in scope of the integrity rules.
Consultees raised that they would like further guidance on whether transitional integrity rules in Chapter 9 apply to intra-group restructure where some ownership interest is bought by head of TCG from another CE, not from third party.
Transfer of ownership interest-deemed treatment as transfer of assets and liabilities
Under GloBE rules where a transfer of ownership interests meets certain conditions, it is treated as acquisition and disposal of assets and lability rather than transfer of ownership interest. We went through detail of eligibility conditions and consequences where eligibility conditions are met. These rules are contained in section 6-50 of Australian subordinate legislation.
We went through examples of various transactions involving TCGs for which eligibility conditions are met and therefore in-scope of section 6-50 and other transactions involving TCGs for which eligibility conditions are not met.
Consultees raised that they would like to see some clarification about ownership interest transfers of a head company of a TCG or tier-1 company of a MEC group. Particularly, whether such transfers could satisfy eligibility condition of section 6-50.
Transfer of assets and liabilities- fair value treatment
The ability to make an annual or 5-year election in section 6-70 to apply a fair value adjustment if certain conditions relating to tax treatment of such assets and liabilities are met was discussed. Where eligibility condition is met and election is made by filing CE, the difference between the carrying value before the event and the fair value must be included as GloBE income or loss.
By presenting the detail we wanted to understand the need for guidance on third party transfer of ownership interests to TCGs, selling of ownership interest in members of TCG and the fair value election, and the drivers behind that need. Additionally we want to understand the prevalence of the fair value election and if there were any aspects of these GloBE rules relating to M&A transactions that lead to unclear outcomes or required further guidance.
Transitional country-by-country reporting safe harbour
Safe harbours are designed to alleviate the compliance burden during the applicable period by only requiring full computations in higher risk jurisdictions. If a tested jurisdiction satisfies any safe harbour test, the top-up tax in the tested jurisdiction is deemed to be zero for the applicable period. The transitional country-by-country reporting (TCbCR) safe harbour applies to fiscal years beginning on or before 31 December 2026, but not including a fiscal year that ends after 30 June 2028. Generally, it will be applicable for 3 accounting periods.
The 3 tests in the TCbCR safe harbour are:
- De minimus
- Simplified ETR
- Routine profits.
The discussion centred around the test that would be most prevalent and where there may be difficulties extracting or obtaining required information.
The meaning of a qualified CbC report and qualified financial statements was discussed, and if there were any specific difficulties in interpreting the defined terms of acceptable and authorised financial statements.
Members of the working group suggested for additional guidance in respect of what constitutes qualified financial statements for the purposes of applying Australia's rules including:
- where the group uses the UPE's consolidated financial statements
- where the group uses both consolidated financial statements for some entities and standalone accounts for some other entities under the same financial accounting standard but with minor threshold related differences (that is, materiality standard)
- where the group's ultimate parent entity is a holding trust that is not required to prepare consolidated financial statements
- in the context of hybrid arrangements with flow-through entities.
Australian interactions plus tax credits and offsets
We provided a general overview on the various treatments of tax incentives in Pillar Two, such as tax credits and tax offsets, depending on the nature of the tax incentive. We explained the distinction between qualified and non-qualified refundable tax credits (QRTC and NQRTC) for Pillar Two purposes which are defined in section 3-125 of the Australian rules. We also discussed the different types of research and development tax incentives provided in Australia, with the refundability depending on the turnover of the entity.
The project team would like to better understand any specific issues the working group have relating to Australian domestic law interactions, including in respect of tax credits and offsets.
Members of the working group sought guidance around integrity rules for foreign income tax offset (FITO)s and foreign tax incentives. The Project Team is collating all the FITO related questions and determining their prevalence before determining whether it is suitable for future guidance.
Legislative instrument update
The project team explained that Sections 127-35(5) and 127-45(5) of Schedule 1 of the TAA1953 delegates power to the Commissioner of Taxation to decide via a legislative instrument specifying circumstances in which a group entity is not required to lodge an Australian IIR/UTPR return and/or the Australian DMT return (which form part of the combined global and domestic minimum tax return). It is therefore an exemptive legislative instrument.
We also explained that the legislative instrument will not be able to exempt lodgment of the GIR (where local lodgment required) or foreign lodgment notification (where UPE or DFE lodges the GIR in a foreign jurisdiction).
The project team then provided an update on the legislative instrument and informed the working group of the ATO's preliminary thinking regarding the categories for exclusion. This item was not raised for discussion but instead to inform the working group of what is currently being contemplated by the ATO in terms of exemption categories. We informed members that there will be a separate consultation process later in the year to provide formal feedback on the draft legislative instrument and the accompanying draft explanatory statement.
We are currently considering scenarios where a legislative instrument exemption from lodgment would be appropriate for IIR, UTPR and DMT.
Any suggestions or considerations for categories of exemption for the Commissioner's legislative instrument should be emailed Pillar2Project@ato.gov.au