Australian tax consolidated groups
The Pillar Two rules apply to multinational enterprise groups (MNE groups). They contain certain interactions with existing corporate income tax grouping rules.
The OECD guidance materials adopt broad definitions for tax consolidated groups designed to capture a range of local tax consolidation regimes, including Australia's tax consolidation regime.
For the purposes of this guidance, a tax consolidated group refers to both a:
- consolidated group (TCG) as defined in section 703-5 of the Income Tax Assessment Act 1997, consisting of a single Australian resident head company and wholly-owned Australian resident subsidiaries
- multiple entry consolidated (MEC) group as defined in section 719-5 of the Income Tax Assessment Act 1997, consisting of Australian-resident subsidiaries that are wholly-owned by the same foreign resident top company with multiple Australian entry points.
Some aspects of the Pillar Two rules only apply to TCGs and not to MEC groups, for example, the OECD aggregated reporting election. We will indicate where this is the case.
Pillar Two and consolidated groups
The Pillar Two rules apply to MNE groups. The composition of an MNE group is, in most cases, determined in accordance with accounting consolidation principles.
Accounting consolidation is undertaken on a global basis. It broadly involves combining the financial results of the ultimate parent entity (UPE) and its controlled subsidiaries into a single set of consolidated financial statements.
Within an accounting consolidated group, there may be sub-groups of entities that form one or more tax groupings recognised under local tax legislation by reference to various concepts of ownership or common control. This guidance focuses on Australian tax consolidated groups.
The Pillar Two framework contains specific rules which can affect how the Pillar Two rules apply to tax consolidated groups. For example:
- Allocation of top-up tax – where constituent entities are part of a tax consolidated group in Australia, their top-up tax liability may be allocated to the head company.
- Lodgment obligations – subsidiary members of tax consolidated groups may be exempt from certain lodgment obligations. Tax consolidated groups can also streamline compliance by nominating a single entity to lodge on behalf of each entity in the MNE group that has a lodgment obligation. In Australia, you can appoint an Australian group entity, including the head company of a tax consolidated group, to undertake the central filing function.
- Special calculation and reporting elections – the Pillar Two rules contain elections that simplify compliance for certain prescribed groups. These include the:
- election to apply consolidated accounting treatment (section 3-200 of the Australian Minimum Tax Rules) – this allows certain intra-group transactions that occur between entities in the same jurisdiction to be excluded from the calculation of top-up tax. This aligns the treatment, to some extent, with how MNEs undertake reporting for tax purposes.
- aggregated reporting election (ARE) – this allows MNE groups to report top-up tax information for entities within a TCG as if they were a single constituent entity in the GloBE Information Return (GIR). This election works in conjunction with the reallocation of domestic minimum tax and undertaxed profits rule top-up tax liability within tax consolidated groups so that reporting and payment are centralised at the head company level.
- transitional simplified reporting election (TSRE) – this provides temporary relief during a transition period by allowing MNE groups to report top-up tax information through jurisdictional-level data rather than detailed entity-by-entity disclosures in the GIR.
- Special, transitional and integrity rules – consolidated groups may be subject to special provisions, particularly in the context of mergers, acquisitions or restructures. Integrity rules may also apply to prevent the manipulation of group structures to avoid top-up tax, including rules governing intra-group transfers of assets during a specified transition period.