When and who the Pillar Two rules apply to

Work out how the Pillar Two global and domestic minimum tax rules apply.

Published 11 December 2024

The 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.

The majority of the GloBE Rules will be contained in subordinate legislation. The subordinate legislationExternal Link has not yet been tabled into parliament.

Dates 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 exceeding 750 million Euros in the consolidated financial statements of the ultimate parent entity (UPE).

Broadly, constituent entities are entities of an MNE group which are not classified as excluded entities under the Australian global and domestic minimum tax. 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 in a jurisdiction that is not the jurisdiction of the UPE.

If the MNE group's annual revenue in at least 2 of the 4 fiscal years preceding the test year meet or exceed the threshold, 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.

Excluded entities

Certain entities of an MNE group are excluded from the operation of the Australian global and domestic minimum tax (known as excluded entities).

Examples of excluded entities include government entities, international organisations, non-profit organisations and pension funds, as well as UPEs which are either an investment fund or a real estate investment fund. The definitions for excluded entities in the primary legislation are based on the GloBE Rules.

Excluded entities do not have an obligation to lodge returns for the purposes of the Australian global and domestic minimum tax. However, to the extent that such entities form part of an MNE group, those entities must be identified as part of the overall corporate structure of the MNE group in the GloBE Information Return. Excluded entities are also required to keep records to explain their determination as being an excluded entity.

OECD safe harbours

Safe harbours available under the Organisation for Economic Co-operation and Development (OECD) model rules

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 existing CBC reporting and financial accounting data as the basis for the safe harbour calculation, 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 top-up tax for that jurisdiction 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 to 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.

Transitional UTPR safe harbour

The transitional UTPR safe harbour allows an MNE to reduce their UTPR top-up tax amount for the UTPR 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).

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 OECD model rules and Administrative Guidance.

More information

For more information, see:

QC103566