BEPS Pillar Two: ATO compliance guidance for affected multinational enterprises

Australia has implemented Pillar Two of the OECD/G20's Two-Pillar Solution to Base Erosion and Profit Shifting (BEPS) by enacting a global and domestic minimum tax law. With lodgment deadlines fast approaching, affected multinational enterprise (MNE) groups must take immediate steps to ensure compliance and avoid substantial penalties.

Australia's global and domestic minimum tax law

The new regime generally applies to MNE groups with annual revenues of €750 million or more in at least two of the four fiscal years preceding the tested year. It comprises:

• the Global Minimum Tax, which includes:
  • the Income Inclusion Rule (IIR), requiring Australian parent entities to pay a top-up tax if the group is taxed below 15% overseas, and
  • the Undertaxed Profits Rule (UTPR), which applies to Australian entities if the group's low-taxed profits earned overseas are not captured under an IIR, and
• the Australian Domestic Minimum Tax (DMT) to impose top-up tax on low-taxed profits earned within Australia.

The IIR and DMT taxes apply to fiscal years commencing on or after 1 January 2024, while the UTPR applies to fiscal years commencing on or after 1 January 2025.

Lodgment obligations and deadlines

MNE groups must lodge returns with the Australian Taxation Office (ATO) including:

• either a GloBE Information Return (GIR), being an OECD-standardised form, or a Foreign Notification Form (FNF) to notify the ATO that the GIR has been lodged overseas
• an Australian IIR/UTPR Tax Return (AIUTR), and 
• an Australian DMT Tax Return (DMTR). 

The FNF, AIUTR and DMTR are expected to be consolidated into a Combined Global and Domestic Minimum Tax Return (CGDMTR). 

Broadly speaking, lodgment deadlines are 18 months after year end for the first fiscal year, and 15 months after year-end for subsequent years. For example, the lodgment deadline for an entity for the fiscal year ending 31 December 2024 as the first year is 30 June 2026.

Transitional relief: ATO's "soft-landing" approach

To support a smooth transition, the ATO has proposed a "soft-landing" approach under Draft Practical Compliance Guideline PCG 2025/D3 to lodgment obligations and penalties. This applies to fiscal years ending before 30 June 2028 and offers transitional penalty relief if MNEs take "reasonable measures" to comply.

Reasonable measures include:

• timely preparation and lodgment of returns
• maintaining records of positions taken
• proactive engagement with the ATO
• prompt correction of errors.

Taxpayers should provide supporting evidence to demonstrate that reasonable compliance measures have been taken.

Failure to lodge (FTL) penalties can reach up to A$825,000. While each entity with a lodgment obligation could be penalised individually at law, the ATO will remit penalties during the transitional period to:

• one FTL penalty for the entire MNE group for the CGDMTR
• one FTL penalty for the entire MNE group for the GIR.

Remission is conditional on demonstrating reasonable compliance measures. The ATO may still impose FTL penalties in cases involving poor compliance history, fraud and/or tax evasion.

The ATO may extend the lodgment deadline for the AIUTR and the DMTR. While it may not extend the deadline for the GIR or the FNF, the ATO may suspend enforcement action if MNE groups take reasonable measures to comply. 

With respect to errors or mistakes in forms, the ATO would typically not impose penalties during the transitional period if they were a result of unfamiliarity with or a lack of clarity in the rules. 

Key actions for CFOs and tax leaders

1. Act promptly. The volume and complexity of data required for compliance necessitate early preparation.
2. Communicate early. The implications of Pillar Two require greater communication between the tax function and broader finance function.
3. Maintain documentation. Keep thorough records of decisions, policies and communications.
4. Engage with the ATO. Early and proactive communication can help mitigate penalties.
5. Leverage technology. Automation and integrated tools such as CCH Integrator BEPS Pillar Two can significantly ease the burden of data collection, reporting and lodgment.

Final Thoughts

BEPS Pillar Two marks a major shift in global tax compliance. MNE groups must prepare thoroughly to meet new obligations and avoid penalties. The ATO's transitional relief offers a valuable opportunity, but only for those who demonstrate reasonable measures to comply.

For further details and resources, view Wolters Kluwer BEPS Pillar Two Resource Hub.