The proposed public Country-by-Country reporting (CBC reporting) legislation continues the ATO's ‘big stick’ approach of driving the correct tax outcomes for multinational companies through tax transparency.
What information will SGEs need to disclose?
Currently, large multinational companies that have global revenues greater than $1 billion are required to lodge confidential CBC reports with tax authorities. Broadly, the ATO refers to these companies as Significant Global Entities (SGE). These confidential CBC reports contain extensive tax information about the worldwide operations of a company.
This latest tax transparency initiative adds to the information contained in the confidential CBC reports and requires that the information is published publicly. On a group-wide basis, an SGE will be required to provide the following information:
- Names of each entity in the CBC reporting group; and
- a description of the group’s “approach to tax”.
In addition, the publicly available CBC report will require the following information to be disclosed, for each jurisdiction that the SGE operates:
- A description of main business activities;
- The number of employees (as at year end);
- Revenue from unrelated parties;
- Revenue from related parties that are not tax residents in that jurisdiction;
- Expenses arising from transactions with related parties that are not tax residents of the jurisdiction;
- Profit or loss before income tax;
- A list of and book value (at the end of the income year) of:
- Tangible assets, and
- Intangible assets, other than cash and cash equivalents
- income tax paid (on cash basis);
- income tax accrued (in the current year);
- Effective tax rate;
- Explanation on the reasons for the difference between current year income tax accrued vis-à-vis the tax amount calculated by multiplying the applicable jurisdictional tax rate to the profit before tax; and
- The currency used in calculating and presenting the required information.
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When does the information need to be disclosed?
The proposed tax transparency requirements will apply for the 2023/24 income year and later income years.
The public CBC report needs to be provided to the ATO within 12 months after the end of the income year to which the report relates. The Commissioner must then, as soon as practicable, publish the report on an (as yet) unspecified Australian Government website.
Can companies apply for an exemption?
The draft legislation allows for entities to be able to apply for an exemption, but granting the exemption would be at the discretion of the Commissioner. While details relating to the precise exemption criteria are expected to be made available in due course, it is likely that companies that have limited international related party dealings may be considered to be a reasonable basis for exemption (amongst others).
What are the penalties for non-compliance?
Australian resident entities that either refuse or fail to comply with their obligation to publish the selected tax information will be subject to penalties and can extend to imprisonment of up to 12 months.
In addition (although not stated), failure to comply with the proposed tax transparency requirements will likely also attract stringent and significant late lodgement penalties that currently apply to SGEs in Australia.
What needs to be done?
In the light of the proposed legislation and its significant potential ramifications, taxpayers are advised to act promptly:
- Evaluate the legislation’s applicability to your organisation and consider whether you should apply for an exemption;
- Ensure management, directors, stakeholders and global headquarters are aware of the proposed requirements;
- Review existing tax strategies and its application in the relevant jurisdictions are in line with the multinational groups’ “Approach to Tax” disclosure requirements, and ensure alignment with your broader Environmental, Social, and Governance (“ESG”) strategy considering the eventual publication of such information;
- Ensure internal systems and controls are established and roles and responsibilities are assigned for the data collation, data review and submission approval;
- Conduct a simulation to ensure the availability and integrity of the tax information and identify any gaps or inconsistencies; and
- Consideration of a framework to respond to the inevitable questions that the public disclosure of this sensitive information is going to garner from the press and financial markets.
The proposed legislation is subject to public consultation with responses due by 28 April 2023.
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