Multinational Tax: OECD’s Concerns and Australia’s Plan

Introduction

Multinational enterprises often use complex strategies to shift profits into low-tax jurisdictions, eroding domestic tax bases and undermining fair competition. The OECD has long warned that base erosion and profit shifting (BEPS) poses a serious risk to the integrity of national tax systems and global economic stability. In response, the OECD’s Inclusive Framework crafted a two-pillar solution known as Pillar One and Pillar Two to ensure large multinationals pay tax where they operate and prevent harmful tax competition. Australia has moved swiftly to adopt these rules by passing legislation to implement both a 15% global minimum tax and a 15% domestic top-up tax, set to take effect in fiscal years beginning 1 January 2024 and 2025 respectively. This article examines the OECD’s concerns, the two-pillar solution, and Australia’s plan to safeguard its tax base.

OECD Concerns: BEPS and Digital Economy Challenges

The OECD defines BEPS as strategies that exploit gaps and mismatches in tax rules to shift profits artificially to low- or no-tax locations, avoiding taxation where economic activity actually occurs. BEPS undermines confidence in tax systems, drains government revenues, and distorts market competition by giving large multinationals an unfair advantage over local businesses.

In an increasingly digitalized economy, taxing rights become even more complex. Digital firms can earn substantial revenues in a market country without having a physical presence there. The OECD’s Global Anti-Base Erosion (GloBE) rules, a cornerstone of the Pillar Two framework, provide a coordinated system to impose a top-up tax whenever a multinational’s effective tax rate in a jurisdiction falls below the agreed 15% floor. This unified approach is designed to restore fairness, ensuring that profits are taxed where value is created, and preventing a “race to the bottom” in corporate tax rates.

The Two-Pillar Solution Explained

To tackle the challenges of BEPS and digitalization, the OECD/G20 Inclusive Framework endorsed a two-pillar solution in 2021:

1. Pillar One reallocates a portion of profits of the largest and most profitable multinationals to market jurisdictions, focusing on digital and consumer-facing businesses.
2. Pillar Two establishes a global minimum tax of 15% through two main rules:
   • The Income Inclusion Rule (IIR), which allows parent jurisdictions to impose a top-up tax on low-taxed foreign profits.
   • The Undertaxed Profits Rule (UTPR), which denies deductions or imposes withholding tax in jurisdictions where the IIR is not applied.

Together, these measures aim to ensure that multinational enterprises pay at least 15% tax on profits in every jurisdiction, curbing profit shifting and leveling the international playing field.

Australia’s Legislative Response

Australia has been among the first to translate the OECD’s Pillar Two model rules into domestic law. On 23 December 2024, the government registered the Taxation (Multinational—Global and Domestic Minimum Tax) Rules, following Royal Assent on 10 December 2024. Key features of Australia’s legislation include:

• 15% Global Minimum Tax: Applies to multinational groups with consolidated revenues of at least €750 million in at least two of the four preceding years.
• Income Inclusion Rule (IIR): Effective for fiscal years starting on or after 1 January 2024.
• Undertaxed Profits Rule (UTPR): Effective for fiscal years starting on or after 1 January 2025.
• 15% Domestic Minimum Tax: A top-up tax on Australian-sourced profits that fall below the 15% rate, also effective from 1 January 2024.

The legislation amends multiple Acts to integrate the GloBE rules within Australia’s tax framework, ensuring coherence with existing laws and minimizing opportunities for tax avoidance.

Implementation Timeline and Practical Steps

Australia’s implementation follows a clear timeline:

• 2024
  • Income Inclusion Rule: For global fiscal years beginning on or after 1 January 2024.
  • Domestic Minimum Tax: Applied concurrently to Australian profits below the 15% threshold.
• 2025
  • Undertaxed Profits Rule: For fiscal years beginning on or after 1 January 2025.

Multinationals must calculate their effective tax rates on a jurisdictional basis and determine any top-up tax due. The Australian Taxation Office (ATO) has issued extensive guidance on Pillar Two mechanics, including top-up tax calculations, safe harbors, and reporting requirements.

Firms should begin collecting data on revenue, profit, and covered taxes by jurisdiction to prepare for annual GloBE returns. Early engagement with tax advisors and system upgrades will be critical to ensure compliance and avoid penalties.

Expected Impact on Multinational Enterprises

Australia’s adoption of Pillar Two rules will have several effects:

• Increased Tax Burden: Global groups will face a higher minimum tax, reducing incentives to shift profits to low-tax jurisdictions.
• Simplified Compliance: A uniform 15% floor and standard reporting reduce complexity compared to varied unilateral measures.
• Level Playing Field: Domestic companies benefit from fairer competition, as foreign multinationals can no longer undercut local firms through aggressive tax planning.
• Revenue Gains: Estimates suggest that a global minimum tax could raise significant additional revenue, improving public finances and funding social programs.

However, large multinational groups must invest in compliance systems and may face disputes over the allocation of taxing rights, especially under Pillar One provisions not yet fully implemented.

Challenges and Criticisms

Despite broad support, the Pillar Two framework faces challenges:

• U.S. Participation Uncertainty: The U.S. has paused implementation of the global tax deal absent congressional approval, leaving the global pact weakened.
• Developing Country Concerns: Some low-income nations worry that a 15% floor may still deprive them of needed tax revenues and prefer higher rates or alternate special regimes.
• Administrative Burden: Smaller multinationals might struggle with data collection and reporting without clear thresholds or de minimis exceptions.
• Potential Tax Wars: Countries might retaliate with digital services taxes or new levies if they perceive unfair treatment, risking fragmentation of the international tax system.

Ongoing OECD work and political consensus will be essential to address these issues and maintain momentum.

Conclusion

The OECD’s concerns over multinational tax avoidance through BEPS and digital economy challenges have led to an ambitious two-pillar solution designed to ensure large enterprises pay a fair share of tax. Australia’s decisive steps—implementing a 15% global minimum tax and a parallel domestic top-up tax—mark a significant milestone in the fight against base erosion and profit shifting. While challenges remain, including U.S. participation and compliance burdens, Australia’s plan sets a strong precedent for other countries. As the rules take effect from January 2024 and 2025, multinationals must adapt swiftly, ensuring robust systems for data collection and top-up tax calculation. Ultimately, these reforms aim to restore confidence in the international tax system, protect domestic revenues, and promote a more equitable global economy.