House of Representatives

Explanatory Memorandum

(Circulated by authority of the Assistant Minister for Competition, Charities and Treasury, the Hon Dr Andrew Leigh MP)

Overview and context for the Two-Pillar Solution in Australia

On 8 October 2021, Australia and 135 other members of the OECD/G20 Inclusive Framework on Base Erosion and Profit Shifting (the Inclusive Framework) agreed to the 'Statement on the Two-Pillar Solution to Address the Tax Challenges Arising from the Digitalisation of the Economy' (the Two-Pillar Solution). The Two-Pillar Solution seeks to reform the international taxation rules and ensure that MNEs pay a fair share of tax wherever they operate and generate profits in today's digitalised and globalised world economy. The Two-Pillar Solution is a result of an OECD and G20 policy process with involvement of 140 countries and jurisdictions.

The Two-Pillar Solution is intended to be achieved through a series of tax reforms, including through the ratification of multilateral conventions and instruments. Different reforms are scheduled on different timeframes but are generally to be implemented as a coordinated approach across jurisdictions, with the earliest reforms taking effect from 1 January 2024.

The Two-Pillar Solution is comprised of Pillar 1 and Pillar 2. Pillar 1 aims to ensure a fairer distribution of profits and taxing rights among countries with respect to certain large MNEs. The GloBE Rules under Pillar 2 ensure that in-scope MNEs will be subject to a global minimum tax rate of 15 per cent. This is achieved through a set of rules which identify low taxed pools of income within a MNE Group and which allow parent jurisdictions, or in some cases, other jurisdictions, to claim taxing rights over that income.

The Australian Government announced its intention to implement key aspects of Pillar 2 in the 2023-24 Budget, as part of its continuing efforts to ensure MNEs pay their fair share of tax.

The charging provisions in the GloBE Rules are composed of the IIR and the UTPR.

The Assessment Bill also implements a domestic minimum top-up tax in respect of Constituent Entities located in Australia that are subject to an ETR below the 15 per cent minimum rate.

The IIR applies by allocating the top-up tax to the Parent Entity generally closest to the top of the corporate structure (the 'top-down' approach). The top-up tax relates to LTCEs that are subject to an ETR below the 15 per cent minimum rate in that jurisdiction.

The UTPR serves as a backstop to the IIR. It permits other jurisdictions to impose top-up tax (by denying deductions or an equivalent adjustment) on certain Constituent Entities to the extent that an LTCE in the MNE Group is not subject to tax under an IIR.

The two sets of rules provide a systematic solution to ensure all in-scope MNE Groups are subject to a minimum of 15 per cent ETR in the jurisdictions in which they operate.

These three Bills form part of a set of legislation required to implement a global and domestic minimum tax in Australia:

•

Imposition Bill: Taxation (Multinational—Global and Domestic Minimum Tax) Imposition Bill 2024;

•

Assessment Bill: Taxation (Multinational—Global and Domestic Minimum Tax) Bill 2024; and

•

Consequential Bill: Treasury Laws Amendment (Multinational—Global and Domestic Minimum Tax) (Consequential) Bill 2024.

The Imposition Bill imposes top-up tax, namely Australian DMT tax, Australian IIR tax and Australian UTPR tax.

The Assessment Bill implements the framework for imposition of top-up tax for the IIR, UTPR and the DMT consistent with the GloBE Rules.

The Consequential Bill contains consequential and miscellaneous provisions necessary for the administration of top-up tax, consistent with the existing administrative framework under Australian tax law and the GloBE Rules.

Australian DMT tax and Australian IIR tax apply for Fiscal Years beginning on or after 1 January 2024. Australian UTPR tax applies for Fiscal Years beginning on or after 1 January 2025.