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International shifts and Australia’s Pillar Two GloBE rules
With the Australian Taxation Office (ATO) necessarily promulgating the issuance of guidance on the Pillar Two Global Anti-Base Erosion Model (GloBE) rules in the face of recent developments abroad, it is appropriate to consider the potential impact of those developments on the sustainability of the GloBE rules.
Firstly, what are the GloBE rules?
The GloBE rules, which were agreed between more than 135 jurisdictions (OECD Inclusive Framework Members) in October 2021, aim to address the tax challenges presented from the digitalisation of the economy and to ensure that large multinational enterprise (MNE) groups are subject to a global minimum tax rate of 15% on their profits, regardless of where those profits are generated.
Underpinning the GloBE rules are the following two interlocking domestic rules to impose top-up tax in certain cases:
- Income Inclusion Rule (IIR), which is the primary rule and generally imposes the top-up tax at the level of the ultimate parent entity (UPE) of the MNE group where the group’s income in a jurisdiction is taxed below 15%; and
- Undertaxed Profits Rule (UTPR), which serves as a ‘backstop’, and operates to deny tax deductions or make equivalent adjustments, thereby effectively collecting the top-up tax (i.e. to ensure a minimum tax level of 15%), to the extent income is not subject to tax pursuant to the IIR.
- The foregoing exist in addition to Qualified Domestic Minimum Top-Up Tax (QDMTT) rules that various jurisdictions have implemented to afford themselves primary rights to collect the top-up tax on low-taxed domestic income.
Australia enacted the GloBE rules in December 2024, with the IIR and QDMTT applying to income years commencing on or after 1 January 2024, and the UTPR applying to income years commencing on or after 1 January 2025.
Recent International Developments
On 28 June 2025, the Group of Seven (G7)[1] announced a ‘side-by-side’ solution whereunder MNE groups with a United States (US) UPE would be exempt under the IIR and UTPR. This solution came in response to US Congress’ passage of the controversial section 899 ‘revenge tax’, which would have subjected residents of Australia (amongst other jurisdictions) to tax in the US of up to 50% on certain US-sourced income.
Separately, on 17 July 2025, the Belgian Constitutional Court referred to the Court of Justice of the European Union (CJEU) a matter pertaining to the validity of the UTPR under various articles of the Charter of Fundamental Rights of the European Union and Treaty on the Functioning of the European Union.
[1] The G7 comprises Canada, France, Germany, Italy, Japan, the United Kingdom and the US.
Potential Implications
Although the ‘side-by-side’ solution undoubtably has the potential to erode the integrity of the global minimum tax framework (including the commitment of OECD Inclusive Framework Members thereto), the immediate implications seem more of a practical and not existential nature. This stands in contrast to the US’ failure to support Pillar One – relating to rules requiring very large global groups to pay additional tax in countries where their customers are based – which arguably left that initiative dead in the water.
This is because US-parented MNC groups will remain subject to QDMTT rules, thereby ensuring that source jurisdictions retain primary rights to impose top-up tax on low taxed profits derived therein. Practical considerations and issues to which the ’side-by-solution’ gives rise include:
- The fact that the ‘side-by-side’ solution is a G7 agreement only, and is yet to receive support from or be endorsed by the 140 OECD Inclusive Framework Members (including Australia);
- Uncertainty regarding how the ‘side-by-side’ solution would be implemented practically, given Australia (along with more than 60 other jurisdictions) has already legislated the GloBE rules, and related issues such as the potential application of non-discrimination treaty articles;
- The administrative approach to be adopted by the Commissioner of Taxation pending finalisation of the ‘side-by-side’ solution, noting that the relevant statutory framework has been in place for several months and first reporting thereunder is less than a year away;
- The potential structural disadvantages the ‘side-by-solution’ could impose on MNE groups that do not have a US UPE, and what advantages might accrue to an MNE group that redomiciles its UPE to the US.
RSM Australia View
Prevailing challenges notwithstanding, the GloBE rules are at this stage by no means ‘dead in the water, not least because they have been legislated in Australia and are in effect, and the Australian Government has not made any statements suggesting it would adopt the ‘side-by-side’ approach.
Hence, it is not surprising that the ATO is proceeding with the development of valuable guidance to assist in-scope MNE groups in complying with these rules.
Despite the uncertainty and the risk of tax fragmentation, in-scope MNE groups can scarcely afford to pause or slow down their response to the GloBE rules, which are fully legislated in Australia and elsewhere and must already be reflected in financial reporting.
RSM Australia, along with other member firms of the RSM International network, is actively monitoring relevant developments.
