With the ATO continuing to focus on their use of data to risk profile multinational taxpayers, changes will impact lodgements before the 15th of January. What should you do?

Taxpayers should:

  • ensure that they are able to source the additional information required; and
  • review their tax positions and ensure that appropriate documentation is prepared, as the new disclosures may likely be part of the ATO’s new audit activities.

Data collection is the basis for profiling high-risk multinational taxpayers

The ATO is stepping up its game when it comes to identifying and targeting taxpayers under the new Base Erosion and Profit Shifting ("BEPS") activities.

Additional information will be required by the ATO for the 2018 and 2019 International Dealings Schedules ("IDS").  This data will be used to identify high risk transactions or structures which will likely be the focus of review in the upcoming years.

What additional information is the ATO looking at in 2018?

The ATO is focusing on the areas they consider are causing the greatest erosion to the Australian tax base. As a result, the following disclosures have been added into the 2018 IDS:

  • Question 13f –disclosures on the cost base and margin earned by Australian companies performing intercompany Research & Development activities ("R&D"). These disclosures may result in queries from the ATO regarding the levels of profits made by Australian taxpayers performing these activities and the economic ownership of the intellectual property developed in Australia.
  • Questions 19a and 29b –disclosures on hybrid income and expenses including:
    • hybrid instruments which are considered debt for tax purposes in one country and are treated as equity for tax in another; and
    • cross-border hybrid entities (e.g. hybrid limited partnerships or hybrid companies).
  • These new disclosures will help identify any potential tax savings obtained by taxpayers, which result from the mismatch of giving a different treatment to the same transaction or entity in two jurisdictions. 
  • Question 28b –operating models involving cross-border activities related to procurement, marketing, sales and distribution functions. These disclosures will highlight any large transactions involving related party intermediaries, which could be considered as high-risk transactions by the ATO.
  • Questions 30b, 37a, 37b and 37c – As a result of the ATO's concerns on higher levels of debt deductions, taxpayers are now required to disclose:
    • whether other tests besides the Thin Capitalisation test have been used to support debt deductions (i.e. the Arm’s Length Debt Test or the Worldwide Gearing Debt Amount); and
    • whether any assets have been revalued under the Thin Capitalisation rules.

Proposed changes to the 2019 IDS

  • For the 2019 IDS,  the ATO will continue to primarily focus on high risk multinationals. Therefore, small businesses will not need to complete an IDS unless:
    • their international related party dealings are greater than 50% of their total aggregated turnover (up to a limit of $5m); or
    • are Significant Global Entities (i.e. entities which are the head of, or part of, a multinational group with accounting consolidated revenue greater than $1 billion).
  • Questions 19a and 29b– A complete a new section will be created for these questions, including information on:
    • deductions denied or income assessed directly under the hybrid mismatch legislation; and
    • a description of any restructures or replacement arrangements, where the arrangement that has been replaced would have been subject to the hybrid mismatch legislation.
  • New CFC questions will be introduced to disclose the gross revenue figures for CFCs, regardless of whether they satisfy the active income test or not.
  • New Taxation Of Financial Arrangement ("TOFA") disclosures will be implemented to help identify and manage profit shifting risks associated with TOFA deductions taken for related party financial arrangements which are not treated as debt interests.
  • Australian Financial Institution subsidiary CFCs, which do not have a local financial license will be required to disclose:
    • tainted interest income excluded from passive income; and
    • the number of such CFCs in specified, listed and other countries