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The Australian Pillar Two rules
The Australian global and domestic minimum tax implements the Global Anti-Base Erosion Model RulesExternal Link (GloBE Rules) through primary and subordinate legislation, referred to together as the Minimum Tax law.
The primary legislation includes the:
- Taxation (Multinational—Global and Domestic Minimum Tax) Act 2024 (Minimum Tax Act)
- Taxation (Multinational—Global and Domestic Minimum Tax) Imposition Act 2024 (Minimum Tax Imposition Act)
- Treasury Laws Amendment (Multinational—Global and Domestic Minimum Tax) (Consequential) Act 2024 (Minimum Tax Consequential Act)
The subordinate legislation includes the:
- Federal Register of Legislation – Taxation (Multinational–Global and Domestic Minimum Tax) Rules 2024 (Australian Minimum Tax Rules)
The Minimum Tax law is to be interpreted in a manner consistent with specific Organisation for Economic Co-operation and Development (OECD) guidance materials for GloBE. Such materials include the GloBE Model Rules, commentary, and agreed administrative guidance.
When the rules apply
The primary legislation provides that the:
- Income Inclusion Rule (IIR) and the domestic minimum tax apply to fiscal years starting on or after 1 January 2024.
- Undertaxed Profits Rule (UTPR) applies to fiscal years starting on or after 1 January 2025.
Who the rules apply to
The Australian global and domestic minimum tax applies to constituent entities that are members of a multinational enterprise group (MNE group) with annual revenue of 750 million Euros or more in the consolidated financial statements of the ultimate parent entity (UPE).
Broadly, constituent entities are members of an MNE group which are not classified as excluded entities under the Minimum Tax law. An MNE group is a group, in most cases determined under accounting consolidation principles, for which there is at least one entity or permanent establishment that is not located in the jurisdiction of the UPE.
- An entity means any legal person (other than a natural person) or an arrangement that is required to prepare separate financial accounts, such as a partnership or trust.
- The primary legislation defines the term permanent establishment for the purposes of the Australian global and domestic minimum tax (explained further below).
If the MNE group’s annual revenue, as shown in the UPEs consolidated financial statements, meets or exceeds the revenue threshold in at least 2 of the 4 fiscal years preceding the test year, then the MNE group is in-scope.
The domestic minimum tax broadly applies to Australian constituent entities in MNE groups to which the global minimum tax applies.
Entities excluded from the rules
Certain entities of an MNE group are excluded from the operation of the Australian global and domestic minimum tax (known as GloBE excluded entities).
Some examples of excluded entities include government entities, international organisations, non-profit organisations, certain service entities and pension funds, as well as UPEs which are either an investment fund or a real estate investment fund.
The definition for GloBE excluded entities in the Minimum Tax law is based on the GloBE Rules. A subsidiary of a GloBE excluded entity is not automatically excluded and should be evaluated in its own respect.
Records must be kept that explain their determination as being an excluded entity.
Consequence of being a GloBE excluded entity
Broadly, if an entity in a MNE group is a GloBE excluded entity then it will:
- not have an obligation to lodge returns for the purposes of the Australian global and domestic minimum tax
- not be liable to top-up tax, since IIR, UTPR and the domestic minimum tax do not apply.
Where an MNE group is composed entirely of GloBE excluded entities, the group is excluded from the operation of the Australian global and domestic minimum tax completely.
Where an MNE group is not wholly comprised of GloBE excluded entities, some obligations may still apply in respect to excluded entities. For example:
- revenue of GloBE excluded entities is included in ascertaining whether the 750 million Euro revenue threshold has been satisfied
- certain disclosures in respect of GloBE excluded entities that are within a MNE group may be required in the GloBE Information ReturnExternal Link.
How the rules apply
The Australian global and domestic minimum tax is applied to an entity with an IIR, DMT or UTPR top-up tax amount. Broadly, the top-up tax amount is calculated via the following steps:
- Calculate the effective tax rate (ETR) of a jurisdiction: The net income of each constituent entity located in the jurisdiction is determined, followed by the taxes attributable to the net income (subject to reporting simplifications). The ETR is determined by dividing the total taxes by the total net income. The mechanisms for calculating net income and attributable taxes are located in the Australian Minimum Tax Rules and refers to financial accounting data with GloBE specific adjustments.
- Calculate the top-up tax for the jurisdiction: MNE groups with an ETR in a jurisdiction below 15% are charged top-up tax relating to the jurisdiction. The tax charged is based on the difference between the 15% minimum rate and the ETR in the jurisdiction. While this is the base case, there are other situations in which top-up tax may arise under the Australian Minimum Tax Rules.
- Determine the top-up tax liability for the entity: The jurisdiction’s top-up tax is allocated among the relevant entities, determined by mechanisms located in the Australian Minimum Tax Rules. If the MNE group’s ETR in Australia is below 15%, constituent entities located in Australia will be allocated and liable for a domestic top-up tax amount. If the MNE group’s ETR in a foreign jurisdiction is below 15%, an IIR or UTPR top-up tax amount may be imposed on constituent entities located in Australia, depending on the MNE group’s structure and ordering rules located in the Australian Minimum Tax Rules. In some situations, stateless constituent entities with an ETR below 15% can also be allocated domestic top-up tax amounts.
Further detail can also be found in the OECD’s Pillar Two Model Rules Fact Sheets (PDF, 170KB)This link will download a file.
Top-up tax can also be applied to an MNE group in respect to joint ventures.
Special rules apply when calculating the top-up tax amounts for certain entities, groups, and arrangements. These rules are intended to cater for different tax regimes and holding structures and can classify entities based on various characteristics, including how they might be treated for tax or accounting purposes.
These special rules can apply to entities, groups and arrangements such as a GloBE permanent establishment, flow-through entity, GloBE JV or GloBE JV subsidiary, GloBE investment entity, minority-owned entity and multi-parented group. They may adjust:
- The jurisdiction the constituent entity is treated as being located in, or whether it is considered stateless.
- Stateless entities are effectively each treated as being located in a separate fictional jurisdiction for the purposes of calculating top-up tax.
- Whether the ETR is calculated on a standalone basis separate from other constituent entities.
- The income and taxes attributed to a certain jurisdiction.
- Which entity is allocated and liable for the top-up tax.
Multinationals must thoroughly evaluate how their entities are treated in each jurisdiction when determining how the rules apply.
Location
Each constituent entity is treated as being in one jurisdiction only for a fiscal year, including where it changes its location. There are rules in Division 4 of Part 5 of the Minimum Tax Act to determine the location of entities and GloBE permanent establishments.
Where an entity changes its location, it is taken to be located in the jurisdiction in which it was located at the start of the fiscal year.
Most entities will be treated as being located in Australia if considered an Australian resident for tax purposes. If not an Australian resident, the location is generally the place of management or place of creation. Specifically, where an entity that is not a flow-through entity, is an Australian resident under section 6 of the Income Tax Assessment Act 1936, and is not, for the purposes of a tax treaty, deemed a resident solely of a foreign country under the treaty’s tie-breaker rules, it is treated as being located in Australia.
Different rules may apply if the entity is considered a GloBE permanent establishment, fiscally transparent, or is dual located.
Dual located entities
If an entity is considered to be located in more than one jurisdiction (that is, dual located), section 10-60 of the Australian Minimum Tax Rules contains its own tie-breaker rules to determine location.
Where a tax treaty between the relevant jurisdictions contains a residency tie-breaker rule, and that rule deems an entity to be resident only of one of the jurisdictions for the purposes of the treaty, the entity will be located in that jurisdiction.
In other cases, the rules deem location broadly based on the amount of taxes paid or tangible fixed assets and payroll expenditure in each jurisdiction, or otherwise where the entity was created if the entity is the UPE.
Dual located parent entities
An override to the tie-breaker rules may apply if the overseas jurisdiction does not apply the IIR and the relevant entity is a parent entity.
Specifically, if an Australian resident parent entity is considered dual located, and section 10-60 of the Australian Minimum Tax Rules deems it as located in a jurisdiction that has not implemented the IIR, section 10-65 deems the parent entity as being located in Australia where Australia is not restricted from taxing the parent entity under the relevant tax treaty.
GloBE permanent establishments
The application of the rules to permanent establishments depends on whether the arrangement meets the definition of a GloBE permanent establishment. This concept is defined differently to how a permanent establishment is defined in other legislation, such as the Income Tax Assessment Act 1997.
GloBE permanent establishments are treated as constituent entities and subject to top-up tax. Any liabilities and obligations are placed on the main entity. A main entity:
- is the entity that includes the financial accounting net income or loss of the GloBE permanent establishment in its financial accounts, and
- must be located in a separate jurisdiction.
Section 19 of the Minimum Tax Act defines a GloBE permanent establishment to include the following simplified scenarios:
- Where an entity has a place of business in a jurisdiction, that constitutes a permanent establishment in accordance with an applicable tax treaty, if the income attributable to it is taxed by that jurisdiction in accordance with a provision similar to Article 7 of the OECD Model Tax Convention.
- Where there is no tax treaty, but the entity has a place of business in a jurisdiction and the income attributable to that place of business is taxed under the local income tax laws on a net basis similar to how its residents are taxed.
- Where a jurisdiction has no corporate income tax system, but the entity has a place of business in the jurisdiction that would have been treated as a permanent establishment under the OECD Model Tax Convention and had the right to tax in accordance with Article 7 of that Convention.
- Where scenarios 1–3 do not apply, a place of business through which an entity’s operations are conducted outside the jurisdiction in which the entity is located, if the income attributable to it is exempt from taxation in the entity’s jurisdiction.
Any top-up tax that would otherwise be allocated to a permanent establishment is imposed on the main entity. The allocation of income and taxes between the main entity and permanent establishment depends on the scenario type of the GloBE permanent establishment. For scenarios 1–3, it follows the attribution of income and expenses under the tax treaty, local tax laws where the permanent establishment is located, or the amounts that would have been attributed in accordance with Article 7 under the OECD Model Tax Convention.
The location of the GloBE permanent establishments falling under scenario 1–3 is where the place of business was determined to be. A GloBE permanent establishment falling under scenario 4 is considered stateless.
Flow-through entities
Broadly, under Chapter 10 of the Australian Minimum Tax Rules, an entity is a flow-through entity to the extent that it is fiscally transparent with respect to its income, expenditure, profit or loss in the jurisdiction the entity was created. A constituent entity is treated as fiscally transparent when the income, expenditure, profit or loss of that entity is treated as if it were derived or incurred by the direct owner in proportion to its ownership interest.
The Australian Minimum Tax Rules also have different classifications of an entity depending on whether it is fiscally transparent in its creation jurisdiction, its owner’s jurisdiction or both. Flow-through entities will be a:
- Tax transparent entity if its owners treat it as fiscally transparent.
- Reverse hybrid entity if the owners treat it as opaque.
These classifications impact the allocation of income and taxes between the constituent entity and its owners, noting there are special rules that apply to flow-through entities that are UPEs.
A flow-through entity that is a UPE or required to apply a qualified IIR will be treated as located where it was created. A flow-through entity that is neither a UPE nor required to apply a qualified IIR will be considered stateless.
GloBE joint ventures
Accounting joint ventures ordinarily are not considered constituent entities as their accounting results are not consolidated on a line-by-line basis in the consolidated financial statements of the UPE.
However, the Australian global and domestic minimum tax may still apply to certain joint ventures, provided it does not fall within an exclusion. The application of the rules to joint ventures depends on whether the arrangement meets the definition in section 26 of the Minimum Tax Act, referred to here as a GloBE JV. This section requires that:
- the entity’s financial results are reported under the equity method in the consolidated financial statements of the UPE of the MNE group for the fiscal year, and
- the UPE’s ownership interest percentage in the entity is at least 50%.
Subsidiaries consolidated for accounting purposes by the GloBE JV on a line-by-line basis may also be in scope and are referred to as GloBE JV subsidiaries.
Broadly, top-up tax for these entities is calculated separately from the MNE group, where the GloBE JV and GloBE JV subsidiaries are treated as constituent entities of a separate deemed group, and the GloBE JV as the UPE. In regard to which entity is allocated and liable for top-up tax:
- IIR and UTPR tax in respect of a GloBE JV or GloBE JV subsidiary is imposed on the MNE group that holds the 50% ownership interest in the GloBE JV.
- Domestic minimum tax is imposed directly on the GloBE JVs and GloBE JV subsidiaries.
Incorporated and unincorporated entities such as companies and partnerships may be considered GloBE JVs or GloBE JV subsidiaries.
Careful consideration of the treatment of the joint arrangement for accounting purposes and whether the arrangement meets definition of GloBE JV is needed to determine the arrangement’s obligations under Pillar Two. This is due in part because not all entities that are classified as joint ventures per the accounting standards will be GloBE JV or GloBE JV subsidiaries and vice versa.
For completeness, entities that are accounting joint operations (which are treated differently to accounting joint ventures under accounting standards) could still be constituent entities of the MNE group. For a joint operation to be a constituent entity, the portion of assets, income, expenses, and liabilities belonging to the joint operator that is a member of the MNE group must be included on a line-by-line basis in the consolidated financial statements of the UPE. In such cases, the top-up tax calculations in respect of the joint operation will be based on the amounts included in the consolidated financial statements.
Our web guidance in respect of JVs may be further updated in light of external Pillar Two consultation undertaken.
Safe harbours
The Minimum Tax law reflects the safe harbours developed by the OECD. Broadly, there are 4 safe harbours available.
- Transitional country-by-country (CBC) reporting safe harbour
The transitional CBC reporting safe harbour allows an MNE group to use CBC reporting and financial accounting data as the basis for the safe harbour calculation. Thereby eliminating the need to undertake detailed GloBE calculations.
This 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. An MNE group may elect to use the safe harbour if it can demonstrate, based on their Qualified CBC Reports and Qualified Financial Statements, that it meets one of the following tests for a jurisdiction:
- de minimis test
- simplified effective tax rate test, or
- routine profits test.
The effect of applying this safe harbour is that the MNE group’s jurisdictional top-up tax for that jurisdiction for the fiscal year is taken to be zero.
- Qualified Domestic Minimum Top-Up Tax (QDMTT) safe harbour
An MNE group may elect to apply the permanent QDMTT safe harbour. The permanent QDMTT safe harbour reduces the top-up tax of a jurisdiction to zero. This is for the purpose of applying an IIR or UTPR in Australia in respect of the jurisdiction, where that jurisdiction applies a QDMTT that has QDMTT safe harbour status. This provides a practical compliance solution to avoid needing to carry out both QDMTT and IIR or UTPR calculations in respect of a jurisdiction.
- Non-Material Constituent Entity (NMCE) simplified calculations safe harbour
MNE groups may elect to use the simplified calculations safe harbour, which includes a simplified method in determining the GloBE income or loss, GloBE revenue and adjusted covered taxes of a NMCE.
This permanent safe harbour allows MNE groups to use these simplified calculations for NMCEs in determining whether the de minimis test, routine profits test or effective tax rate test has been met for a jurisdiction under the safe harbour.
Broadly, an NMCE is a constituent entity that has not been consolidated in the UPE’s consolidated financial statements solely due to size or materiality.
Where an MNE group meets one of the simplified calculations safe harbour tests, the top-up tax for the jurisdiction is taken to be zero, with some limited exceptions. Simplified calculations are currently only available for NMCEs. Constituent entities other than NMCEs have to apply the usual GloBE computational rules as part of the simplified calculations safe harbour.
- Transitional UTPR safe harbour
The transitional UTPR safe harbour allows an MNE to reduce their UTPR top-up tax amount in respect of the UPE jurisdiction (only) to nil during the transitional period, if the UPE jurisdiction has a nominal corporate income tax rate of at least 20%. This safe harbour applies to fiscal years beginning on or before 31 December 2025 and ending before 31 December 2026.
The consolidated commentaryExternal Link provides further information on the safe harbours available and applicable tests where relevant. For details, download the OECD Commentary to the GloBE Rules and refer to Annex A – Safe Harbours: Global Anti-Base Erosion Rules (Pillar Two).
The Australian Minimum Tax Rules also include its own de minimis exclusion in Part 5-5 that can apply for particular jurisdictions.
Additional simplifications
To ensure qualification of Australia’s global and domestic minimum tax, we are unable to provide concessions, simplifications or safe harbours that are inconsistent with the outcomes provided for in the GloBE Model Rules and administrative guidance.
For more information, see:
- OECD GloBE RulesExternal Link
- Safe Harbours and Penalty Relief (20 December 2022) (PDF, 460KB)This link will download a file
- Illustrative Examples (25 April 2024) (PDF, 1.88MB)This link will download a file
- Agreed Administrative Guidance (2 February 2023) (PDF, 1.24MB)This link will download a file
- Agreed Administrative Guidance (17 July 2023) (PDF, 1.05MB)This link will download a file
- Agreed Administrative Guidance (18 December 2023) (PDF, 478KB)This link will download a file
- Agreed Administrative Guidance (17 June 2024) (PDF, 3MB)This link will download a file
- Administrative Guidance, Legislation with Transitional Qualified Status (15 January 2025) (PDF, 469KB)This link will download a file
- Administrative Guidance on Article 8.1.4 and 8.1.5 (15 January 2025) (PDF, 390KB)This link will download a file
- Administrative Guidance on Article 9.1 (15 January 2024) (PDF, 427KB)This link will download a file
- Pillar Two Model Rules Fact Sheets (PDF, 170KB)This link will download a file