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Tax Planning

How Pillar Two is Rewriting Tax Planning for Australian Multinationals

The OECD Pillar Two framework is changing the global tax landscape—Australian multinationals must adapt their tax planning, entity structure, and finance operations to stay compliant and competitive.

By NomadicTax Research Team · 5-8 min read

What is Pillar Two and why it’s important

Pillar Two is part of the OECD/G20 driven Two-Pillar Solution aimed at ensuring multinational enterprise (MNE) groups pay a minimum 15% tax per jurisdiction. Australia has adopted these global rules via legislative changes called the Global Anti-Base-Erosion (GloBE) Rules. (ato.gov.au)

Key components:

  • Income Inclusion Rule (IIR): Top-ups on income taxed below 15% overseas for parent entities starting 1 January 2024. (ato.gov.au)
  • Undertaxed Profits Rule (UTPR): Backstop mechanism for entities where the effective rate remains below 15%, starting 1 January 2025. (ato.gov.au)
  • Domestic Minimum Tax: Australia’s right to impose top-ups on domestic income taxed below 15%. (ato.gov.au)

Changes to thin capitalisation and DDCR rules

Recent reforms introduce stricter controls over debt deductions and cross-border interest payments for private and multinational groups:

  • A fixed ratio test limiting interest deductibility to 30% of EBITDA by default. (ato.gov.au)
  • Group ratio and third-party debt tests providing alternative methods. (ato.gov.au)
  • The DDCR disallow debt deductions for related-party funding of asset acquisitions or distributions, effective from income year starting 1 July 2024. (ato.gov.au)

Tax planning strategies under new regime

  1. Evaluate global effective tax rates across jurisdictions.

    • Use modelling tools to anticipate where IIR or UTPR liabilities may arise.
    • Consider shifting investment destinations or reorganising operations.

  2. Re-structure intercompany debt.

    • Where related-party debt exists, third-party debt test may be more generous, but terms must be genuine.
    • Document interest rates, guarantees to avoid being reclassified or denied under DDCR. (ato.gov.au)

  3. Flow income through entities taxed at or above 15%.

    • Where feasible, shift profits to jurisdictions with compliant rates, avoiding complex top-ups.

  4. Stay up to date on lodgment and reporting obligations.

    • GloBE Information Return (GIR) and Domestic Minimum Tax returns required; first lodgments due by 30 June 2026. (ato.gov.au)
    • DSTs and other rules still apply depending on country and revenue thresholds.

Examples

Example A: Multinational retailer with parent in Australia, subsidiaries in low-tax countries.

  • Apply IIR to bring up foreign subsidiary tax to 15%.
  • For some entities with structurally low tax, UTPR may apply as backstop.

Example B: Private group with predominantly related-party debt financing for overseas acquisitions.

  • Under DDCR, related-party interest on that debt may be denied.
  • Use third-party debt or restructure to avoid harsh debt-deduction limitations.

Bottom line for corporate decision-makers

  • Pillar Two and thin capitalisation reforms are now the law—not proposals. (ato.gov.au)
  • Entities earning multinational revenue, or heavily leveraging debt, should reassess structure immediately.
  • Ensure rigorous documentation: arm’s-length interest rates, proper intercompany agreements, reliable accounting methods.
  • Engage advisors early: the compliance burden is increasing, including reporting and possibly paying more tax if overseas operations under-taxed.

Sources

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