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The global tax landscape is being revamped with the introduction of Country-by-country Reporting (CbCR) as part of the Organisation for Economic Co-operation and Development’s (OECD’s) BEPS Action Plan 13 transfer pricing guidelines aiming at increasing tax transparency.

CbCR applies to multinational enterprises with annual consolidated group revenue equal to or exceeding EUR 750 million (or equivalent in domestic currency), requiring the lodgement of annual statements detailing business activities and allocation of profits to the tax authorities of the countries where they carry out business.

Following the OECD’s CbCR guidelines, the Australian CbCR legislation was introduced in December 2015 as the new Subdivision 815-E of the Income Tax Assessment Act 1997 (Subdivision 815-E ITAA97) and became effective from 1 January 2016.

Who are targeted?

The Australian CbCR requirements reflect most of the recommendations of Action 13 and target a group of entities designated as ‘significant global entities’, comprising Australian resident corporate entities that are either ‘global parent entities’ or members of consolidated multinational groups with an annual global income exceeding A$1 billion.

According to the Australian Taxation Office (ATO), the concept of significant global entity also includes cases where the global group’s annual income exceeds the A$1 billion threshold due to an extraordinary transaction in one year only, unless the group is granted an exemption upon written application to the Commissioner.

As PwC mentioned, all significant global entities operating in Australia must lodge CbCR statements regardless of their volume of operations or the materiality of international related party dealings. Failing to comply, including late lodgement, will lead to the application of potentially extremely high penalties to the company.

Matters for compliance

Even though CbCR represents a major step in increasing tax transparency and improving risk assessment, complying with CbCR is not without challenges. Significant global entities will need to evaluate their organisations in the context of a new global tax environment, and to some extent, adapt their organisational arrangements to help prepare themselves for CbCR expectations and achieve compliance.

Complying with Subdivision 815-E ITAA97 is an onerous and time-consuming task, especially where there are several overseas entities that may come within the scope of the provisions. A failure by multinational enterprises to implement an appropriate level of disclosure as required by CbCR may result in a substantial backlash from consumers and governments at both a local and global level. Therefore, CbCR statements represent an important tool both for entities and for the ATO in terms of risk assurance.

In its ‘Guidance on Transfer Pricing Documentation and Country-by-Country Reporting’, the OECD has advised that ‘the specific content of the various documents reflects an effort to balance tax administration information needs, concerns about inappropriate use of the information, and the compliance costs and burdens imposed on businesses. Consequently, Australian significant global entities must keep proper accounting records, as well as proper records of their practices, processes, standards and evidence of any reviews thereof.

Organisational and reporting arrangements may need to change

As authoritative guidelines for reporting entities, CbCR can have implications for Australian reporting entities’ extant organisational arrangements. Richard Murphy suggests that the issue of CbCR represents an important extension of corporate governance and corporate social reporting by interfacing such requirements into a global tax forum.

As there is no universal approach established to guide and prepare significant global entities for CbCR, entities will need to plan for CbCR with respect to entity-specific needs and circumstances. As mentioned by KPMG, entities can prepare for CbCR compliance and any (un)anticipated challenges by developing flexible CbCR approaches and strategies. Ideally, CbCR compliance strategies should be established at the global parent entity level. Where this is not possible, then it is essential that local global parent entity and subsidiary level strategies are developed to help govern reporting entities.

The introduction and requirements of CbCR may require significant global entity boards to not only strategise, but also to reconsider their corporate governance structures and financial reporting arrangements. Reporting entities may face difficulties in gathering all required information and providing complete reports to its tax authorities. Therefore, in preparation for CbCR, significant global entities should clearly assign roles, responsibilities and accountabilities among the global parent entity group to determine who is responsible for preparing and submitting the reports and files required by CbCR, and who will be liable if requirements are not met.

The vast amount of information required for CbCR will trigger the need for appropriate data collection and management systems as well as staff. While the Australian country-by-country (CbC) report and the master file closely follow the OECD template, the Australian local file departs from the OECD model in relation to both content and structure, being much closer to the International Dealings Schedule (IDS), which forms part of the Australian transfer pricing documentation requirements. Furthermore, the Australian local file follows a two-tier structure, aiming at facilitating compliance by less complex entities. Effective data management systems and processes will be vital to help alleviate the problems of preparing CbC reports and achieving greater synergies across all corporate entities reporting.

The provision of detailed and transparent financial information about a significant global entity’s group operations and tax strategies to tax authorities via CbCR can give rise to reputational risks and exposures. If reporting entities are not fully compliant, their CbC reports may unveil information that leaves the entity’s tax affairs under further scrutiny where the entity may face reputational harm from tax authorities as well as the public. Therefore, the extensive requirements of CbCR may require the adoption of proactive data analytic approaches and processes that can help better detect and manage various risks.

The need for global co-operation

While the implementation of a policy on CbCR can be viewed through the Australian prism, effective implementation will depend on global co-operation.

With the release of the OECD Action Plan 13 concerning CbCR disclosure and the formalisation of the Australian requirements in Subdivision 815-E ITAA97, the local Australian and global environment has become much more aware of, and concerned by, fiscal leakage through BEPS, and there is a call for a cohesive and global effort to address the implementation of CbCR obligations.

While Subdivision 815-E ITAA97 very much mirrors Action 13, the CbCR legislation from other countries may not be as consistent with the BEPS Action Plan. Thus, the Australian CbCR legislation may encounter various challenges. For instance, there are several uncertainties as to whether overseas financial statements need to comply with the Australian accounting standards, or whether the consolidated statements of the parent entity would be compliant. Hence, in order to mitigate the potential challenges and penalties, Australian significant global entities will need to consider their governance structures, strategies and processes to ensure CbCR becomes established as an authoritative guideline for organisational and tax behaviour.

 

The article underlying this blog post was written before Livia joined the ATO and does not reflect the ATO’s opinions on any of the matters discussed herein.

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