The ATO has released guidance on how Pillar 2 minimum tax rules apply to tax consolidated group restructures, covering the treatment of deferred tax assets and liabilities during transition years, asset transfer integrity rules, and the conditions governing ownership interest transfers and fair value elections.
The Australian Taxation Office has released guidance on tax consolidated group restructures and transition rules, outlining how Australia’s Pillar 2 minimum tax rules apply to acquisitions, restructures, and other ownership or asset transfers within tax consolidated groups.
The guidance covers the following:
Restructure rules and transition rules for tax consolidated groups
The Pillar Two rules contain specific provisions dealing with acquisitions and internal restructures. This page covers 2 categories of rules that can affect how Pillar Two attributes are treated for tax consolidated groups when calculating a jurisdiction’s effective tax rate (ETR). These are the group restructure rules and related transition rules. This page does not cover every aspect of those rules in detail. It focuses on implications for tax consolidated groups where restructures have occurred.
Section 9-5: Baseline transition rule
As a simplification measure, the transition rule in section 9-5 allows opening accounting DTAs and DTLs to be brought into the transition year for Pillar Two purposes, subject to certain exceptions and modifications.
For these DTAs and DTLs, the transition rule sets the transition year tax attributes as the lower of the DTAs and DTLs recorded or disclosed in the financial accounts of the constituent entity, or these amounts re-casted to 15%.
Specific adjustments which are normally required during the transition year and subsequent fiscal years, such as dealing with recapture DTLs or excluding DTAs for items excluded from GloBE income, are not needed for transition year attributes.
Subsection 9-5(3): Baseline integrity rule
Transition year DTAs are subject to an integrity rule contained in subsection 9-5(3), which limits the recognition of accounting DTAs that arise due to permanent differences between GloBE income or loss and taxable income.
DTAs in scope of this rule must arise in respect of items excluded from the computation of GloBE income or loss and must relate to a transaction that occurred after 30 November 2021, and before commencement of the transition year (referred to as the ‘window period’ hereafter).
The effect of subsection 9-5(3) is to exclude reversals of accounting DTAs from the total deferred tax adjustment amount for a fiscal year that is a transition year or a subsequent fiscal year.
Section 9-15: Asset transfer integrity rule
Section 9-15 applies to transfers of assets (other than inventory) between members of an MNE group that occur after 30 November 2021 and before the transition year of the disposing constituent entity.
This rule requires the acquiring constituent entity to treat the transferred asset as having been acquired for an amount equal to the carrying value in the hands of the disposing constituent entity upon disposition for Pillar Two purposes.
The GloBE carrying value as at the beginning of the transition year is the accounting carrying value upon disposition, adjusted for subsequent capitalised expenditure, depreciation and amortisation amounts after the transaction and before beginning of the transition year.
Section 6-30: Ownership-interest transfer rule
Part 6-2 of the Australian Minimum Tax Rules applies where, as a result of transfer of ownership interests, an entity becomes, or ceases to be, a constituent entity of an MNE group.
Section 6-30 (Article 6.2.1(c) of the GloBE Rules) provides that, in cases where the target entity becomes a constituent entity of an acquiring MNE group, the GloBE income or loss and adjusted covered taxes of the target entity are to be determined using the target’s historic accounting carrying values of assets and liabilities in accordance with the acceptable financial accounting standard (or authorised financial accounting standard, if applicable).
This rule is consistent with subsection 3-10(4) (Article 3.1.2 of the GloBE Rules) which prohibits taking into account purchase price accounting (PPA) adjustments that are recorded in the accounts of the target constituent entity, or the consolidated financial statements, in these circumstances.
Scenario 1a: Transactions entered into before 1 December 2021
Where the relevant transaction has occurred prior to 1 December 2021 and is subject to section 6-30 of the Australian Minimum Tax Rules, the relevant GloBE DTAs and DTLs of the target entity that are to be brought into the transition year under subsection 9-5(1) (Article 9.1.1) must be based on the GloBE carrying value instead of the carrying value amounts used to determine the deferred tax expense accrued in the financial accounts, unless the exception relating to not having sufficient records mentioned above applies.
Scenario 1b: Transactions entered into after commencement of the transition year
Transactions occurring after the commencement of the transition year, in which a target entity becomes a constituent entity of an MNE group, are also subject to section 6-30 of the Australian Minimum Tax Rules. For these transactions, DTAs and DTLs are also determined based on the difference between GloBE carrying values (determined using the historical carrying value of assets of the target, excluding purchase accounting adjustments) and their tax basis.
Scenario 2: Transactions entered into between 1 December 2021 and beginning of transition year – acquisition of target entity that becomes a constituent entity
Subsection 9-5(3) of the Australian Minimum Tax Rules (Article 9.1.2 of GloBE Rules) does not apply to exclude DTAs arising from a transaction that is an acquisition of ownership interests in a target entity from a non-group entity that results in the target becoming a constituent entity of the MNE group. The non-application of subsection 9-5(3) in these circumstances extends to any DTAs arising under Australia’s tax consolidation entry tax cost setting rules as a result of the target becoming a constituent entity of the MNE group.
Scenario 3: Transactions entered into between 1 December 2021 and beginning of transition year – group entity transaction
Subsection 9-5(3) (Article 9.1.2) of the Australian Minimum Tax Rules has broad application. It can apply to exclude DTAs that arise as a result of an acquisition of ownership interests between 1 December 2021 and the beginning of the transition year (window period) by a member of a tax consolidated group in a target that was already a constituent entity of the applicable MNE group.
Section 6-50: Transfer of controlling interest deemed transfer of assets and liabilities
Eligibility conditions
Section 6-50 treats certain transfers of ownership interests as a transfer of assets and liabilities. It applies to acquisitions or disposals of controlling interests in a constituent entity. There are two eligibility conditions that must both be met for section 6-50 to apply.
These are:
- The jurisdiction in which the target entity is located must, for tax purposes, treat the acquisition or disposal of the controlling interest in the target in the same or similar manner as an acquisition or disposal of the underlying assets and liabilities of the target.
- That jurisdiction imposes a covered tax on the seller of the controlling interest, based on the difference between the tax basis of the underlying assets and liabilities of the target and the consideration the seller received in exchange for the controlling interest, or the difference between that tax basis and the fair value of those assets and liabilities.
Section 6-70: Fair value adjustments election
Eligibility for fair value adjustments election for transactions involving tax consolidated groups
The filing constituent entity of an MNE group may make an annual election, or a 5-year election, to apply a fair value adjustment, if certain conditions are met. An election can be made if, because of a triggering event, a constituent entity is required or permitted to adjust the basis of some or all of its assets, or the amount of some or all of its liabilities, to fair value for tax purposes in the jurisdiction in which it is located.
