Specific issues for Pillar Two

Misaligned fiscal years

Fiscal year

For global and domestic minimum tax purposes, the term 'fiscal year' generally refers to the accounting period for which the ultimate parent entity (UPE) of a multinational enterprise group (MNE group) prepares its consolidated financial statements.

If the UPE does not prepare consolidated financial statements, the fiscal year of the UPE and the group entities will be the calendar year instead.

As such, a constituent entity's own accounting period does not determine its fiscal year for Pillar Two purposes, only the UPEs. Lodgment due dates for Australian group entities are also determined using the fiscal year of the UPE.

Fiscal year misalignment and performing calculations

Some MNE groups may have constituent entities that maintain financial accounts based on a different accounting period to that of the UPE.

There are 2 different accounting conventions MNE groups use to reconcile such differences, depending on the accounting standard adopted in the preparation of the consolidated financial statements.

• Inclusion of full fiscal year results: some MNE groups will include the constituent entity's financial accounting results for the accounting period that ends within the UPE’s fiscal year. This may result in some income or expenses being attributed to a period before the UPE’s fiscal year begins.
  • For example, the UPE’s consolidated financial statement for the fiscal year ended 31 December 2025 may include an Australian constituent entity’s accounting results for the full accounting period ended 30 June 2025.
• Segregation and combination of results: other MNE groups will split the constituent entity's results to match the UPE’s fiscal year, combining the parts of the constituent entity’s 2 accounting periods that align with the UPE’s reporting period.
  • Under this method, using a similar example, the UPE’s consolidated financial statements for the fiscal year ended 31 December 2025 may include the Australian constituent entity's accounting results from 2 different accounting periods:
    • 1 January to 30 June 2025
    • 1 July to 31 December 2025.

The top-up tax calculations for a constituent entity with a different accounting period to its UPE will be based on whichever method has been employed to include the constituent entity’s results in the UPE's consolidated financial statement. The revenue of the constituent entity will also be included on this basis in determining whether the MNE group has met the revenue threshold for the purposes of the global and domestic minimum tax.

There may be instances where a constituent entity with a different accounting period to its UPE is not included in the UPE's consolidated financial statements, such as on materiality grounds. In such cases, top-up tax calculations must be based on the financial accounting period that ends during the UPE’s fiscal year to ensure the necessary data to perform the top-up tax calculations is available when the GloBE Information Return (GIR) for that fiscal year is due.

In line with ordinary record keeping requirements, taxpayers are required to keep records supporting the accounting method used.

Prior period adjustments

Certain adjustments are required to a constituent entity's top-up tax calculations when there are changes to its covered tax liability in a previous fiscal year. Adjustments depend on whether the total adjustments to covered tax liabilities for that prior year for all constituent entities located in the same jurisdiction are:

• an increase or decrease
• a material or immaterial decrease
• a decrease that relates to a pre or post-GloBE fiscal year.

Increase or immaterial decrease to prior year covered taxes

When there is an increase in total adjustments to prior fiscal year covered tax liabilities of all constituent entities located in the same jurisdiction as the relevant constituent entity, that increase is treated as an adjustment to the relevant constituent entity’s adjusted covered taxes in the current year.

When the total adjustments is an immaterial decrease, the filing constituent entity may make an annual election to treat those adjustments as an adjustment to the relevant constituent entity's adjusted covered taxes in the current year. If an election is not made, then the treatment for decreases, other than an immaterial decrease, applies.

A decrease in covered tax liabilities for a prior fiscal year is considered immaterial where the sum of the adjustments to those liabilities is less than 1 million Euro.

Decrease to prior year covered taxes

The treatment of adjustments which lead to a decrease, other than an immaterial decrease, in covered tax liabilities for a prior fiscal year depends on whether the prior fiscal year in question is a pre or post-GloBE fiscal year.

Prior fiscal year is a GloBE fiscal year

Where the sum of the adjustments to the liability for covered taxes for the prior year is a decrease, other than an immaterial decrease covered by an election, the relevant constituent entities are required to:

• reduce their adjusted covered taxes for the prior year by the amount of the decrease
• adjust their GloBE income or loss for all relevant fiscal years as necessary.

The effective tax rate and jurisdictional top-up tax for the prior year is recalculated. Any resulting increase in jurisdictional top-up tax for the prior year is treated as an addition to top-up tax in the current year rather than in the prior fiscal year.

Where, for accounting purposes, the decrease in covered tax liability has been treated as a decrease to the income tax expense of the current fiscal year, there should also be a corresponding increasing adjustment for the purposes of calculating the current year’s adjusted covered tax.

The MNE group is not required to amend its GIR, or any tax returns filed in association with the GloBE Rules for the prior year in which the adjustment relates. However, the adjustment will be reflected in the current year GIR and tax return.

Prior fiscal year is a pre-GloBE fiscal year

Where a decrease in covered taxes relates to a fiscal year prior to the application of the global and domestic minimum tax, no adjustments in the prior year are required. This means that there should not be any additional current top-up tax arising from recalculations of effective tax rates of pre-GloBE fiscal years.

However, relevant adjustments must still be made to the current year adjusted covered taxes. For instance, where the sum of the adjustments to the liability for covered taxes for the prior year is a decrease, other than an immaterial decrease covered by an election, the relevant constituent entities are not required to recalculate the prior year adjusted covered taxes. They should still include a corresponding increasing adjustment in calculating the current year's adjusted covered taxes where there has been a decrease to the income tax expense of the current fiscal year.

Deferred taxes and pre-GloBE fiscal years

Where the prior year adjustment relates to deferred tax expense, resulting in a decrease in income tax expense relating to a pre-GloBE fiscal year, an increasing adjustment should be included in calculating the current fiscal year's adjusted covered taxes. However, this prior period adjustment and its impact on the reversal of a deferred tax liability or deferred tax asset should be taken into account when determining the amount of the deferred tax liability or asset to be recognised in the transition year and any subsequent fiscal year.