In recent years, the landscape of corporate taxation has undergone significant transformation. The most recent is the introduction of the Global Minimum Tax (GMT) in Australia.
This GMT framework represents a landmark initiative for Australia. The draft primary legislation adopts the OECD’s Pillar Two Global Anti-Base Erosion (GloBE) rules. The implementation of the GMT means that multinational enterprises (MNEs) will be subject to a minimum tax rate of 15% on their global profits.
The purpose of the draft primary legislation is to improve tax transparency, by establishing a more equitable and coordinated approach to corporate taxation worldwide. It has been designed to tackle the issues caused by MNEs shifting profits and avoiding taxes.
In the Thomson Reuters Digital Transformation in Tax Compliance and Statutory Reporting 2023 Survey Report, participants were asked how the changing global, macroeconomic climate was impacting their organisation. Two in five decision makers (40%) said that the global push for tax transparency was accelerating their DX strategy.
The draft primary legislation applies to both MNEs expanding into new markets and local enterprises with international operations. Staying informed about the GMT is essential for maintaining regulatory compliance and managing tax risks.
We delve into the most common questions and concerns around the global minimum tax draft primary legislation:
1. What is the scope of the GMT rules?
The Australian rules cast a wide net on organisations. Global minimum tax rules apply to MNEs with consolidated revenue exceeding EUR 750 million (approx. AU$1.2 billion) in at least two of the last four years.
It is estimated that by 2025, close to 90% of MNEs with revenues in this range will be covered by GMT. This makes it a significant factor for businesses operating across borders.
Exemptions exist for certain entities like investment funds, governmental bodies, and not-for-profits.
2. How do the GloBE rules level the tax playing field?
There are currently over 140 jurisdictions introducing the GloBE rules. The coordinated structure of the rules ensures that MNEs pay a minimum level of tax in each jurisdiction.
The 15% minimum tax rate establishes a level playing field and curbs tax competition among jurisdictions. Some countries may have higher corporate tax rates. However, the effective tax rate for MNEs as per GlobE rules can often be much lower due to various deductions and exemptions available under existing corporate tax laws, which may not be available under GlobE rules.
3. How will the global minimum tax improve public services
The global minimum tax is anticipated to increase tax revenues, through direct application and by reducing profit shifting activities. This additional revenue can be allocated to enhancing infrastructure, education, and other public services. The GMT can also bolster global competitiveness for both large and smaller enterprises.
Global developing countries stand to benefit from more transparent rules. This will also reduce the pressure to offer tax incentives. However, it still allows for exemptions based on genuine economic activity.
4. What are the substance based carve-out rules?
One key provision of the GMT is the substance-based carve-out. This refers to an income exemption that considers the substance of an economic activity or transaction. This rule aims to preserve investment incentives while ensuring that tax is paid on profits generated from substantive activities.
It consists of 5% of tangible asset’s carrying value and 5% of payroll costs for jurisdiction-based activities. During a 10-year transition period, it starts with 10% carve-outs for payroll and 8% for assets. These percentages gradually decrease to 5%. The substance-based carve-out rule prevents triggering additional GloBE top-up tax and applies broadly across industries.
5. How to address tax book differences
Timing differences between financial accounting and tax recognition present challenges under the GMT rules. The deferred tax accounting approach in GloBE rules addresses temporary tax-book differences. It considers the overall deferred tax adjustments reported in the financial accounts of the group entity for the year. It then eliminates deferred tax adjustments based on management’s future projections to tax losses and tax positions. It also disregards deferred tax related to items not within the GloBE tax base.
Safeguards are integrated into this approach to prevent misuse and over-taxation. Tax payments within an appropriate timeframe receive credits. However, deferred tax assets and liabilities are capped to prevent excess credits. A recapture rule restricts permissible timing differences to a maximum of five years.
6. Are there provisions for losses?
There are exceptions for certain long-term items like cost recovery allowances. An additional mechanism allows MNEs incurring losses in low-tax jurisdictions to carry forward losses as deemed tax assets.
The global minimum tax rules also include a transition provision for losses incurred before their implementation. Tax attributes, like losses from financial accounts, can typically be carried forward and used to offset future income. This avoids cases where minimum tax is imposed just because an MNE benefits from pre-rule tax losses.
8. Is there a risk of being over-taxed?
Incorrect application of the GloBE rules may inadvertently result in excess taxation across jurisdictions. The Priority Rule helps address this risk by establishing a hierarchy for applying various anti-base erosion and profit shifting measures (i.e. anti-BEPS).
The rule reviews where the MNE has substantial economic activities, and which jurisdiction the income is most connected to. By clarifying this, the Priority Rule prevents disputes and ensures that multiple jurisdictions cannot tax the same income or profit.
9. What is the minimum top-up tax?
An Income Inclusion Rule (IIR) mandates that a country must include certain income earned by controlled foreign corporations (CFCs) in the taxable income of its resident taxpayers. A qualified domestic minimum top-up tax (QDTT) targets resident taxpayers to pay an additional tax if the effective tax rate paid by a foreign subsidiary fall below the minimum threshold under the GloBE rules.
Both the IIR and the QDTT are compulsory components of the GMT framework. They are designed to ensure that MNEs pay a minimum level of tax on their global income, regardless of where it is earned. This prevents profit shifting to low-tax jurisdictions.
10. Compliance relief with safe harbours
Safe harbours provide MNEs with relief from cumbersome compliance requirements under the GloBE rules, especially in low-risk jurisdictions. Some safe harbours include transitional measures like the CbCR (country by country reporting) which eliminate MNE’s top-up tax for a jurisdiction. This safe harbour is applicable to fiscal years started on or before 31 December 2026.
To be eligible for a transitional CbCR safe harbour, the MNE must meet one of the following criteria:
- De minimis test: For smaller jurisdictions with total revenue under EUR $10 million and CbCR profit (or loss) is less than EUR $1 million. This exclusion allows a tax exemption on certain low-value items or transactions.
- Effective tax rate test: The jurisdiction has an effective tax rate (ETA) that is equal to or greater than the transition rate for the fiscal year. The transition rate is 15% for 2024, 16% for 2025 and 17% for 2026.
- Routine profits test: The jurisdiction profit (or loss) is equal to or less than the substance-based income exclusion.
While multinationals can seek transitional safe harbours provisions, they should be used with caution. While they can provide relief, they may also create unintended consequences or opportunities for abuse.
11. Eligibility for permanent simplified calculations
A permanent safe harbour is available for jurisdictions. This safe harbour involves simplified calculations for income, revenue, and tax. MNEs eligible for the permanent safe harbour will not need to calculate top-up tax liability under the GloBE rules.
The MNE’s jurisdiction must meet at least one of the following criteria to qualify for simplified calculations:
- De minimis test: As per the transitional safe harbour test, this is for smaller jurisdictions with total revenue under EUR $10 million and CbCR profit (or loss) is less than EUR $1 million. This exclusion allows a tax exemption on certain low-value items or transactions.
- Effective tax rate test: The jurisdiction has an effective tax rate (ETA) that is equal to or greater than 15% for the fiscal year. The only difference between this and the transitional ETR criteria, is that this ETR may use simplified income, revenue, and tax calculations.
- Routine profits test: The jurisdiction profit (or loss) is zero. The jurisdiction must also show a GloBE loss.
The strategic advantage of early adoption
Some MNEs might believe they have time until mid-2026 to comply with GloBE information return. However, the impact of global minimum tax must be considered in tax reporting promptly.
Many large organisations already prepare tax provisions regularly for management reporting. With GMT, additional data collection and top-up tax calculations will be necessary within the same reporting period. Participating MNEs may also need to start including specific GloBE disclosures into their financial reports as per applicable standards.
Implementing GMT compliance strategies early is a competitive advantage, as organisations will have more time to integrate tax strategies and navigate compliance complexities carefully. They have can optimise tax processes, improve data quality, and leverage technology effectively. Early adopters can also avoid penalties and reputational risks associated with non-compliance and tax provisioning errors.
Harnessing automation for GMT success
As multinationals gear up for the GMT regulations, harnessing the right technology infrastructure is key to ensure successful adoption. According to the Thomson Reuters Global Minimum Tax Compliance whitepaper, decision makers are increasingly investing in tax technology, with 84% planning to increase spending in the next year.
Corporate tax leaders should consider a comprehensive strategy to navigate the Global Minimum Tax (GMT) framework. This includes prioritising tasks such as:
- optimising data collection,
- gaining real-time country-specific insights,
- creating process efficiencies, and
- identifying skills gaps within their teams.
Automation can provide a robust framework to streamline these processes and manage tax complexities across jurisdictions effectively.
