![workplace-with-people-in-walking-in-blurred-motion-in-modern-office-space_AdobeStock_714071973](https://www.nortonrosefulbright.com/-/media/images/nrf/hero/workplace-with-people-in-walking-in-blurred-motion-in-modern-office-space_adobestock_714071973.jpeg?w=265&revision=757b8aa8-f74f-4e2d-9ccd-084ec5192278&revision=5250277392097387904&hash=380B464034E4102358A0D456AAB43445)
Publication
Merger law reform in Australia: What next after the Exposure Draft?
As expected, the Australian Commonwealth Treasury released an exposure draft for the proposed new Australian merger regime on 24 July 2024.
Global | Publication | May 2022
The corporate taxation of cross-border groups is at the brink of significant change. In 2021, after years of discussions, the members of the OECD/G20 Inclusive Framework (IF) on Base Erosion and Profit Shifting agreed a blueprint to impose new taxing rights in respect of low-taxed income of large multi-national enterprises (MNEs). The OECD has since published model rules and commentary on a key aspect of this blueprint, known as the OECD Pillar Two GloBE Rules (the GloBE Rules), and various regions and jurisdictions are now moving quickly towards implementation in accordance with ambitious timelines.
The aim of the GloBE Rules is to ensure that MNEs pay a minimum level of corporate income tax in respect of each jurisdiction in which they have a presence through one or several group entities either being tax resident or having a permanent establishment there; simply put, they are designed to reduce the scope for tax rate arbitrage.
The GloBE Rules come into play where the primary taxing jurisdiction is not charging corporate income to tax at an effective rate of 15% or more; the idea underpinning the GloBE Rules is that this leaves taxing rights on the table and it will then be open to certain other jurisdictions to take up those taxing rights instead. This is a novel way of conceptualising and allocating international taxing rights. The implication of the GloBE Rules is therefore to create radically new taxing nexus rules.
The GloBE Rules will apply to international MNE groups (i.e. groups with one or more controlled entities or permanent establishments located in a jurisdiction other than the UPE jurisdiction) with annual global consolidated revenue of more than €750 million. MNEs are generally in scope if the revenue in the Consolidated Financial Statements in two of the four Fiscal Years immediately preceding the tested Fiscal Year exceeds this threshold.
Certain types of groups and entities will be excluded from the scope of the GloBE Rules (although their revenue still counts towards the €750 million test); this will be the case in respect of governmental entities, pension funds, some investment vehicles as well as international and non-profit organisations.
Broadly speaking, the GloBE Rules contain detailed provisions to (i) calculate whether an MNE is subject to additional tax (referred to in the GloBE Rules as Top-Up Tax); and (ii) allocate taxing rights in respect of any such additional Top-Up Tax.
The GloBE tax calculation is based on six key concepts:
The GloBE Rules contain two mechanisms for charging any Top-Up Tax that may be due in respect of an MNE in a particular jurisdiction:
The IIR is subject to a split-ownership rule for shareholdings below 80%. In cases of split ownership further down a chain, such partially-owned entities will be subject to the IIR in priority to the UPE, thereby ensuring that third parties bear a fair share of any Top-Up Tax. The amount of Top-Up Tax charged on entities higher up the chain will be reduced accordingly.
There is a clear hierarchy between the two charging mechanisms: the UTPR will only come into play where the IIR has not operated to exhaust taxing rights pursuant to the GloBE Rules. This will generally be the case where parent entities are based in jurisdictions that have not implemented an IIR (including where low-taxed entities are not wholly owned and only some of the parent entities are subject to an IIR).
The following example illustrates how the IIR and UTPR operate:
Company A and Company B are resident in Jurisdiction 1 and are wholly owned by Company C which is resident in Jurisdiction 2. Company C in turn is wholly owned by Company D which is resident in Jurisdiction 3. Companies A, B, C and D together form part of an in-scope MNE of which Company D is the ultimate parent.
Assuming that the Effective Tax Rate of Companies A and B in Jurisdiction 1 is less than 15%, the starting point under the GloBE Rules is that if Jurisdiction 3 has implemented an IIR, the Top-Up Tax in respect of Companies A and B will be imposed by Jurisdiction 3 on Company D. If Jurisdiction 3 has not implemented an IIR but Jurisdiction 2 has, then Jurisdiction 2 can charge the Top-Up Tax on Company C.
If neither Jurisdiction 3 nor Jurisdiction 2 have implemented an IIR, then the UTPR will come into play so that any jurisdiction in which the MNE has a presence (including, for example, through Company E, being another subsidiary of Company C, resident in Jurisdiction 4) can charge a proportionate amount of the Top-Up Tax by denying a tax deduction or making an equivalent adjustment in respect of the MNE entity based in its jurisdiction.
Exactly how the rules apply will of course depend on the specific MNE group but there are some specific points which merit particular mention:
The publication of the GloBE Rules and the Commentary by the OECD marks a milestone towards implementation of the new framework; yet, much remains to be seen about how they will operate in practice. In addition, a number of key points relating to the operation of the GloBE Rules are yet to be agreed at international level. This includes the nature and scope of safe harbour provisions to allow for simplified application of the rules in low-risk situations.
While the GloBE Rules are subject to a “common approach”, meaning that they should be implemented and administered by IF members in a way that is consistent with the outcomes provided for under Pillar Two, there will nevertheless be scope for divergence as to how jurisdictions choose to approach certain points. In particular, the GloBE Rules leave open to IF members to impose a “domestic minimum tax” on low-taxed MNEs – the QDTT discussed above – so as to pre-empt other jurisdictions from charging that tax pursuant to an IIR or UTPR. Some jurisdictions (including the UK and Canada) have already signalled that they will likely impose a domestic minimum tax in this way.
In addition, the OECD is to look at the conditions under which the US GILTI regime will co-exist with the GloBE Rules, to ensure a level playing field. There are a number of differences between the Pillar Two regime and the existing US GILTI regime, including with regard to minimum tax rates, minimum thresholds, exclusions and ownership conditions.
The OECD’s intention is that the GloBE Rules should be enacted at national level in 2022, with the IIR to come into effect in 2023 and the UTPR to follow in 2024. Given the complexity of technical aspects not wholly addressed by the GloBE Rules and concerns raised by the business community, it may prove difficult for IF members to meet those timelines.
Publication
As expected, the Australian Commonwealth Treasury released an exposure draft for the proposed new Australian merger regime on 24 July 2024.
Subscribe and stay up to date with the latest legal news, information and events . . .
© Norton Rose Fulbright LLP 2023