The Australian Government has continued its push for transparency on how Significant Global Entities (SGE) organise their operations and tax affairs.
Country-by-Country (CbC) reporting is part of a broad suite of international measures aimed at combating tax avoidance through more comprehensive exchanges of information between countries. CbC reporting was the first tangible impact flowing from the OECD/G20 Base Erosion and Profit Shifting (BEPS) and implements Action 13.
Australia’s CbC reporting role mirror global efforts to shine the light on SGE financial and tax arrangement. The ATO is one of approximately 57 tax authorities that will exchange the CbC reports.
Who does CbC reporting affect?
CbC reporting applies to Australian tax residents or foreign residents with an Australian Permanent Establishment (Australian Reporting Entity), that have annual global revenues of over A$1 billion.
The proposed new rules represent an additional burden which Australian companies will need to comply. However, it is important to note that the threshold for these transparency measures will apply irrespective of the size of the Australian resident. Mid-sized businesses that are part of larger global multinational companies will need to prepare and submit the CbC reports to the ATO.
What is CbC reporting?
SGE’s will be required to lodge with the ATO the following CbC statements:
- a Country-by-Country (CbC) report, which includes the following information for each country that the Multinational operates: revenue, profit (loss) before income tax, income tax paid, income tax accrued, stated capital, accumulated earnings, tangible assets, number of employees and main business activity.
- a Master File, which provides an overview of the Multinational's global business, its organisational structure and its transfer pricing policies.
- a Local File, which contain detailed information about the local taxpayer's operations and intercompany transactions.
Generally, the Australian reporting entity will be responsible for providing the Master File and the Local File. The CbC report will need to be lodged separately, usually by the head entity.
The ATO has outlined two ‘tiers’ of local file, with the amount of information required for a particular local file tier reflecting the entity’s business operations, complexity and perceived level of risk:
- Short Form Local File, and
- Detailed Local File.
The Australian Reporting Entity can provide the short form local file to the ATO if it meets at least one of the following criteria:
- the aggregate value of its international related party dealing is less than $2 million and it has no international related party dealings on the short form exceptions list, or
- the Simplified Transfer Pricing Record Keeping criteria for ‘small taxpayers’ and materiality, and it has no IRPDs on the short form exceptions list.
If an Australian Reporting Entity chooses to voluntarily lodge Part A of their Detailed Local File at the same time as their Income Tax Return, they will not need to complete Questions 2 to 17 of the International Dealings Schedule.
When does the CbC reporting apply?
The CbC reporting rules will apply for income years starting on or after 1 January 2016. This means that companies with June year ends will need first to comply with the CbC reporting rules for the year ending 30 June 2017, while December balancers will be impacted for the year ended 31 December 2016. The annual statements will need to be provided to the ATO within 12 months of the year end.
The CbC reporting represents a significant change in approach by the ATO. For the first time, Multinationals operating in Australia will be required to provide detailed information about their global operational, financial and tax outcomes as part of their annual compliance to the ATO. It allows the ATO an unprecedented level of transparency into the financial and commercial operations of SGEs operating in Australia. This will allow the ATO to better target transfer pricing risks and allocate its resources accordingly.
Significantly, the CbC reporting is an additional compliance burden. SGE’s are still required to maintain Australian contemporaneous documentation to obtain relief from penalties in the event of an ATO transfer pricing adjustment.
