2025 marks a consolidation point in the implementation of the OECD’s BEPS project’s Pillar Two, which aims to ensure a minimum effective tax rate of 15% for large multinational groups. In this context, Australia has adopted a series of legislative and administrative measures designed to operationalize the GloBE rules, including the Income Inclusion Rule (IIR), the Undertaxed Profits Rule (UTPR), and the Domestic Minimum Tax (DMT).
This regulatory framework includes the instrument Taxation Administration (Exemptions from Requirement to Lodge Australian IIR/UTPR Tax Return and Australian DMT Tax Return) Determination 2025, published in the Federal Register of Legislation. Although this instrument does not directly regulate transfer pricing, its content has relevant and structural implications for the management, documentation, and defense of transfer pricing policies of multinational groups with a presence in Australia.
This article analyzes the scope of this determination, its regulatory logic, and its functional relationship with transfer pricing in a global minimum tax environment.
Nature and scope of the Australian regulatory instrument
Determination 2025 is an administrative instrument issued under the Taxation Administration Act 1953, whose main objective is to establish specific exemptions from the obligation to file Australian tax returns related to the IIR, the UTPR, and the DMT.
In general terms, the instrument identifies certain entities, structures, and situations in which it is not necessary to file:
- the Australian IIR/UTPR Tax Return, and/or
- the Australian DMT Tax Return.
These exemptions apply, among other cases, to:
- entities that are part of consolidated groups or Multiple Entry Consolidated (MEC) groups
- certain GloBE joint ventures;
- entities that are not established in Australia but belong to a multinational group subject to GloBE rules;
- flow-through entities or fiscally transparent structures;
- securitization entities under GloBE criteria.
The purpose of the instrument is not to reduce the material tax burden, but to avoid duplication, unnecessary reporting, or administrative inconsistencies within the global minimum taxation system.
Structural relationship between Pillar Two and transfer pricing
Although the instrument does not expressly mention transfer pricing, its interaction with it is inevitable and profound. This is because the calculation of the Effective Tax Rate (ETR) under the GloBE rules is based on:
- adjusted accounting results,
- covered taxes,
- allocation of income and expenses between group entities,
- and jurisdictional segmentation of results.
All these elements are directly influenced by transfer pricing policies, particularly with regard to:
- the allocation of operating margins;
- the remuneration of routine and non-routine functions;
- the characterization of entities as distributors, manufacturers, service providers, or financing entities;
- the determination of intra-group payments for services, royalties, and financial transactions.
Consequently, even though an Australian entity may be exempt from filing an IIR, UTPR, or DMT return, the results that feed into the overall minimum tax calculation still depend on the correct application of the arm’s length principle.
Formal exemptions do not equate to lower substantive risk
A recurring error is to assume that the formal exemptions introduced by this regulation imply an automatic reduction in tax risk or the level of taxation. From a transfer pricing perspective, this interpretation is conceptually incorrect and technically unsustainable.
Determination 2025 does not modify the requirement that intra-group transactions be valued in accordance with the arm’s length principle, nor does it limit the powers of the Australian Taxation Office (ATO). The tax authority retains full authority to question the consistency of margins obtained with the functions and risks assumed, the economic reasonableness of intra-group financing arrangements, and the substance of payments for services or intangibles within the group.
This point is particularly relevant in a Pillar Two implementation environment. Transfer pricing adjustments no longer have exclusively local effects, but can impact the group’s jurisdictional effective tax rate. An adjustment in Australia can alter global minimum tax calculations and lead to exposure to top-up tax in other jurisdictions, significantly broadening the scope of tax risk.
Importance of consistency between transfer pricing documentation and GloBE reporting
The implementation of administrative exemptions such as those provided for in Determination 2025 reinforces the need for absolute consistency between:
- transfer pricing documentation (Local File, Master File);
- consolidated financial information;
- and GloBE calculations performed at the group level.
Inconsistencies between these elements may trigger cross-checks by the ATO or other tax administrations, even when certain entities are formally exempt from reporting.
In this sense, transfer pricing policies cease to be a purely local exercise and become a central risk management tool for Pillar Two.
Impact on intra-group financing structures and services
The exemptions contemplated in the instrument also have practical relevance for complex structures, such as:
- intra-group financing centers;
- regional corporate services;
- holding entities with limited functions.
In these cases, an incorrect functional characterization or remuneration that is not aligned with the arm’s length principle can distort jurisdictional results and compromise the proper application of administrative exemptions.
Therefore, transfer pricing policies must be reviewed not only from a corporate income tax perspective, but also considering their impact on global minimum tax calculations.
An administrative instrument with strategic effects
The Taxation Administration (Exemptions…) Determination 2025 does not introduce new transfer pricing rules or modify the substantive framework of the arm’s length principle in Australia. However, its importance lies in the fact that it is part of the operational machinery of the Pillar Two regime, where transfer pricing is a critical input.
Reporting exemptions reduce administrative burdens, but increase the requirement for technical consistency, documentary robustness, and economic alignment of intra-group transactions. In this new environment, transfer pricing is no longer an isolated compliance issue and is now fully integrated into the global tax strategy of multinational groups.
For companies with a presence in Australia, a proper understanding of this instrument and its interaction with transfer pricing policies is essential to mitigate risks, anticipate audits, and ensure a defensible tax position in a context of increasing international cooperation between tax administrations.
Specialized advice in a more complex tax environment
In an environment marked by Pillar Two and greater tax scrutiny, proper transfer pricing management is key to mitigating risks and avoiding impacts on the group’s ETR. TPC Group, a firm specializing in transfer pricing, provides multinational groups with expert guindance on the evaluation, structuring and defense of intra-group operations under international standars.
Source: GOV.AU