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.
Are you ready?
If your multinational group has annual global revenue greater than $1 billion, you may need to prepare and submit CbC reports. Can you answer these questions?
- Are you familiar with the information that should be included in the CbC reports?
- Who will be responsible for preparing the CbC reports?
- Are your IT systems and processes able to provide the necessary information?
- Do you understand your tax and transfer pricing risk profile?
- Have you performed a transfer pricing stocktake - when was your organisation’s Master file last prepared?
We recommend that multinationals who may be caught by CbC reporting to:
- Assign responsibilities with the tax and financial teams.
- Identify and address IT issues.
- Identify which operations should be included (JVs? Branches? Dormant companies?).
- Reconcile numbers with tax returns and statutory accounts.
Can I get an exemption for CbC reporting?
If you have a CbC reporting obligation, you can request an exemption from some or all of the obligations. The exemption can be requested for between one (1) and three (3) reporting periods. The application must be made in writing and should set out the facts and circumstances relevant to your CbC reporting obligations, including:
- the statements from which you seek exemption (i.e. one or more of the CbC report, master file and local file)
- the reporting period(s) for which you seek exemption
- the name(s) and, where applicable, TFN(s) or ABN(s) of the entity or entities for which you seek an exemption
- the entity type (for example, company, partnership or trust) and tax residence of the entity for which you seek an exemption
- the name of your global parent entity, the country in which it is a tax resident and, if known, its taxpayer identification number in that country
- your reasons for seeking an exemption, and
- any documents supporting your request.
Information that can be provided to the ATO to support an exemption request might include:
- correspondence with your global parent entity
- references to information contained in documents previously lodged with us, for example, in your income tax returns, International Dealings Schedules (IDS) and the annual compliance reports associated with your Advance Pricing Arrangement (APA) applications
- correspondence from a relevant tax authority (in English or a certified English translation) regarding any exemptions your global parent entity may have in respect of CbC reporting
- demonstration of any potential compliance costs of meeting your CbC reporting obligations.
The ATO will decide each exemption request on a case by case basis. In cases where your global parent entity is a resident in a jurisdiction that has not yet implemented CbC reporting, the ATO may grant an exemption depending on your facts and circumstances.