Top-up tax for tax consolidated groups

Calculation and allocation of top-up tax

The Australian global and domestic minimum tax contains provisions that may affect the way in which members of a tax consolidated group calculate and allocate top-up tax liability. These include:

• Calculation – a filing constituent entity of the multinational enterprise (MNE) group can elect to follow the consolidated accounting treatment. This allows elimination of intragroup transactions between members of the tax consolidated group when determining their GloBE income or loss. This broadly aligns with the disregarding of those transactions for income tax purposes.
• Allocation – special rules allocate any DMT and UTPR top-up tax of a subsidiary member of a tax consolidated group to the head company. This means the head company will be liable for that top-up tax.

We also outline below an ATO administrative approach to allocation of DMT and UTPR top-up tax where one or more entities to which top-up tax is allocated are subsidiary members of a tax consolidated group. This recognises that some MNE groups report DMT and UTPR top-up tax on a net basis for a tax consolidated group as opposed to an entity-by-entity basis. We generally will not devote compliance resources to assess the allocation approach taken by MNE groups provided certain conditions are met.

Consolidated accounting treatment

Under section 3-200 of the Australian Minimum Tax Rules, MNE groups can elect to apply consolidated accounting treatment to certain constituent entities within a tax consolidated group. This election can be made in section 3.2.3 of the GloBE Information Return (GIR).

If the election is made, amounts arising from intra-group transactions are eliminated when calculating top-up tax. This is to the extent the transactions are not recognised under the consolidated accounting treatment applied by the ultimate parent entity (UPE).

Eligibility criteria

An election to apply consolidated accounting treatment applies to constituent entities of an applicable MNE group that:

• are located in the same jurisdiction
• are included in a tax consolidation group (as defined in subsection 3-200(4))
• share the same effective tax rate (ETR) computation.

The reference to a tax consolidation group in subsection 3-200(4) includes Australian tax consolidated groups (that is, tax consolidated groups (TCGs) and multiple entry consolidated (MEC) groups).

The election can also apply to transactions between members of a subgroup, including between:

• minority owned constituent entities (MOCEs)
• investment entities and insurance investment entities
• joint venture group entities.

Effect of election

This election adjusts the way in which top-up tax is calculated by eliminating from the calculation of GloBE income or loss, the income, expenses, gains and losses of same-jurisdiction intra-group transactions. The elimination is made only where these transactions are eliminated in the UPE’s consolidated financial statements.

The election cannot be revoked for the election year or the 4 succeeding fiscal years. In the fiscal years in which the election is made or revoked, special rules apply to ensure that the GloBE income or loss of consolidated entities are calculated appropriately.

This election only permits the elimination of certain intra-group transactions between separate constituent entities. It does not consolidate or aggregate those entities into a single entity, for either top-up tax calculation or reporting purposes.

Entities that undertake this election should have regard to the specific reporting simplifications in the GIR. For more information, see Tax consolidated group reporting for Pillar Two.

Where the election is not made, each constituent entity must separately determine its GloBE income or loss before any consolidation adjustments.

Allocating top-up tax

The Australian Minimum Tax Rules include specific provisions about the allocation of DMT and UTPR top-up tax amounts within tax consolidated groups.

The provisions are contained in:

• section 2-40 of the Australian Minimum Tax Rules for DMT top-up tax amounts
• section 2-50 of the Australian Minimum Tax Rules for UTPR top-up tax amounts.

Where these provisions apply, subsidiary members of tax consolidated groups must:

• reduce their DMT and UTPR top-up tax amounts to zero
• allocate those amounts and the resulting liability to the head company subject to certain exceptions.

This effectively results in a 'bottom up' approach to allocation of DMT and UTPR top-up tax for tax consolidated groups.

The reallocation of top-up tax amounts does not affect the computation of top-up tax but simply shifts the liability and payment obligations for such amounts to the head company.

These provisions do not apply to IIR top-up tax amounts. To the extent a subsidiary member has an IIR top-up tax amount (for example, because the head company of the tax consolidated group is an excluded entity), that subsidiary member will be liable to pay that amount.

Top-up tax for members leaving or joining a tax consolidated group

In some cases, an entity may be a constituent entity of an applicable MNE group for an entire fiscal year but be a subsidiary member of a TCG or MEC group within that applicable MNE group for only part of the fiscal year. In these circumstances, top-up tax calculated for the entity for the fiscal year will still be entirely reallocated to the head company of the tax consolidated group.

In some other cases, an entity may be a constituent entity of more than one applicable MNE group in a given fiscal year, including where the fiscal years of the applicable MNE groups are not the same. In these circumstances, where the entity was a subsidiary member of a TCG or MEC group while it was a constituent entity of each applicable MNE group, the special allocation rules still apply to allocate the subsidiary member's DMT and UTPR top-up tax amounts to the head companies of the respective tax consolidated groups. The top-up tax amount allocated to each head company will be the amount of top-up tax calculated for the subsidiary member for the fiscal year for the particular MNE group.

Allocating DMT top-up tax

Under the Australian Minimum Tax Rules, DMT top-up tax is first allocated to Australian constituent entities, including head companies and subsidiaries of tax consolidated groups, in proportion to their GloBE income. However, under subsections 2-40(2) and (4), subsidiaries of tax consolidated groups must reduce their DMT top-up tax amount to zero and the head company must increase its amount by the same total. This results in a 'bottom up' approach to allocation of the jurisdictional DMT top-up tax for tax consolidated groups.

We acknowledge that some MNE groups have systems that may not allocate DMT top-up tax within a tax consolidated group on an entity-by-entity basis. Instead, these systems may only determine relevant items on a ‘net' basis for the tax consolidated group, resulting in a single amount of DMT top-up tax for the entire tax consolidated group. This approach is referred to as the ‘top-down’ approach to allocation of jurisdictional DMT top-up tax.

We generally don't intend to devote compliance resources to reviewing allocations of jurisdictional DMT top-up tax where one or more entities to which top-up tax is allocated are subsidiary members of a tax consolidated group, irrespective of whether the MNE group uses a ‘top-down’ or ‘bottom up’ approach. This is provided the total DMT top-up tax amount for Australian constituent entities is correct and consistent with the result under the ‘bottom-up’ approach, which is the approach required by law.

Our practical approach also complements the OECD’s guidance on the GIR, where certain elections are available to reduce compliance burden on MNE groups. These elections include the:

• Aggregated reporting election
• Transitional simplified reporting election.

Allocation of DMT top-up tax examples

 

Allocating UTPR top-up tax

Under the Australian Minimum Tax Rules, the amount of an MNE group's total UTPR top-up tax amount that is allocated to Australia (the Australian allocated amount) is then further allocated to constituent entities of the MNE group located in Australia. This allocation is in proportion to each constituent entity's number of employees and the value of its tangible assets. Certain entities, such as investment entities and securitisation entities, may be excluded from the distribution of the jurisdictional UTPR top-up tax amount.

Under subsections 2-50(2) and (4) of the Australian Minimum Tax Rules, subsidiaries of tax consolidated groups that are distributed an amount of jurisdictional UTPR top-up tax must reduce their UTPR top-up tax amount to zero. The head company must increase its UTPR top-up tax by the amount of each subsidiary's reduction. This results in a 'bottom up' approach to allocation of the jurisdictional UTPR top-up tax for tax consolidated groups.

In contrast, where an MNE group's systems are unable to determine GloBE attributes on an entity-by-entity basis, those systems might calculate the number of employees and value of tangible assets on a ‘net' basis for the tax consolidated group. This results in a single figure for these attributes for the entire tax consolidated group, leading to a ‘top-down’ distribution of jurisdictional UTPR top-up tax.

We do not intend to devote compliance resources to review how Australian UTPR top-up tax is allocated to constituent entities located in Australia where one or more constituent entities are subsidiary members of tax consolidated groups. This applies regardless of whether the MNE group allocates top-up tax using the 'bottom-up' or 'top-down' approach. As this allocation is based on employee numbers and tangible assets, the amount of UTPR top-up tax allocation for tax consolidated groups results in the same amount of top-up tax that is consistent with the rules, regardless of which approach is adopted by an MNE group.