How does being a Significant Global Entity affect your Australian tax obligations?

The Australian Government first introduced the concept of a significant global entity (SGE) in 2015 to increase the transparency of multinational groups with global group turnover in excess of AUD$1bn. 

It was designed to align with the Organisation for Economic Co-operation and Development (OECD) Base Erosion and Profit Shifting (BEPS) initiatives relating to Country-by-Country reporting (CbCR).

However, in 2020 the Australian government amended and expanded the definition of an SGE to ensure
that the definition applied consistently to all types of entities, including members of large multinational groups headed by individuals, partnerships, private companies, trusts, investment entities (private equity groups) and other entities.

However, as a consequence, even a small Australian company can be included under the SGE provisions, depending on their ownership structure.

This new SGE definition extended further than the OECD BEPS initiative, so the definition of a CbCR entity was also introduced, to ensure that Australia’s additional compliance filing requirements remained closely aligned to the OECD’s recommendation. The diagram to the right shows that all CbCR entities are an SGE, though not all SGEs are CbCR entities.

CbCR entities are required to attend to the additional compliance filing requirements, most notably the lodgement of General Purpose Financial Statements (GPFS) and CbCR as discussed below.
 

1. GPFS

GPFS A CbCR entity that is a corporate tax entity with an Australian presence must file GPFS with the Commissioner by the lodgement due date of its income tax return pursuant to section 3CA of the TAA1953.  This requirement will not apply if the GPFS has already been lodged with the Australian Securities and Investment Commission (ASIC). Although the Commissioner of Taxation does not have statutory authority to provide exemptions for GPFS, it can grant extensions.

Filing GPFS with the ATO via the tax agent portal can often be overlooked by taxpayers who do not have audit or filing requirements with ASIC, or by tax agents who are unfamiliar with these rules.

The Commissioner will give a copy of the GPFS to ASIC, which will appear on ASIC's register and be made publicly available. This has raised some privacy concerns for multinationals, where this information may not have previously been made public.

Taxpayers should consider how they will satisfy their GPFS reporting requirements in advance of their year-end to ensure lodgement can be made by the due date. Failure to do so may result in significant late lodgement penalties from the ATO.
 

2. CbCR

A CbCR entity will also be required to lodge its CbCR filings in Australia within 12 months of year-end pursuant to Subdivision 815-E of the ITAA 1997. This comprises the following three reports to the ATO detailing its global financial activities:

• The CbC Report: Contains information about where the economic activity is undertaken and profits that are reported by the global group.
• The Master File: Contains a high-level description of the group’s global business operations, including an outline of the group structure as well as intangibles and intercompany financing.
• The Local File: Contains information about a local entity’s management structure and business strategy, cross border related party transactional data, including information about how transfer pricing decisions have been made as well as financial accounts for the Australian entity.

The parent company will usually prepare most of the work relating to the CbC Report and the Masterfile, though the Australian entity will need to ensure a CbC report notification is submitted to the ATO along with the Master File. 

Australia follows the OECD for both of these reports. If the parent company is not expecting to have a CbC Report or Master File prepared for the Group, they may be able to seek certain exemptions from the ATO, though it is best to raise these issues as soon as possible to ensure they qualify.

However, local assistance is usually required to prepare the Australian Local File, in part because Australia’s Local file
is quite different to an OECD Local File. The Australia Local File consists of a Short form, Part A and Part B and requires detailed transactional information to be reported to the ATO, including intercompany agreements, making it a more data-based submission.

Multinationals should note that an Australian Local File does NOT constitute transfer pricing documentation, as Australian transfer pricing documentation is more aligned to an OECD Local File. with relevant obligations arising elsewhere in the legislation. Australian transfer pricing documentation would include (amongst other things) an analysis regarding the actual conditions of the taxpayer for the income year, how these align with the arm’s length conditions and whether a transfer pricing benefit arises in Australia.

In addition to CbCR, there are two new compliance considerations for SGEs in Australia, being public country-by-country reporting and Pillar II compliance.  

3. Public CbCR (PCbCR)

PCbCR rules are similar to the Confidential OECD CbCR reporting framework, but have an additional layer of reporting. The purpose of PCbCR is to enhance tax transparency of multinational enterprise (MNE) groups operating in different tax jurisdictions. The framework for PCbCR is found under the TAA 1953 under sections 3D to 3DB. 

Effective from reporting periods commencing on or after 1 July 2024, these MNE groups are expected to publicly disclose their tax and financial information on a jurisdictional basis. Similar to CbCR, the PCbCR filings are due within 12 months of the relevant reporting period. This information will be publicly available on the Australian Government website data.gov.au. 

In Australia, an MNE group has PCbCR obligations if it satisfies all of the following:

• The entity is a constitutional corporation,  or a partnership (where each partner is a corporation), or a trust (where each trustee is a corporation).
• The entity was a CbCR parent, during the previous reporting period.
• It is a member of a CbCR group at any time during the reporting period.
• The group has an Australian resident company or a foreign resident operating an Australian permanent establishment (PE).
• The Australian entity derived an aggregated turnover  that includes AUD 10 million Australian-sourced income or more for the relevant reporting period.
• They do not have a full PCbCR exemption.

In contrast to CbCR, the PCbCR filing obligation rests with the PCbCR parent entity rather than the Australian entity, provided the parent entity is not resident in Australia. The definition of a PCbCR parent is consistent with the definition of a CbCR parent under Subdivision 815-E of the ITAA 1997. Broadly, a CbCR parent is an entity with annual global income of AUD 1 billion or more that is not controlled by another member of the group.

The PCbCR parent entity is required to register with the ATO at least four weeks prior to the publication of any PCbCR information. Registration is also required in relation to other PCbCR matters, including applications for exemptions.
Operations in Australia and specified countries must be disclosed on a Country-by-Country basis. In this regard, a list of the specified countries can be found on the ATO website. Conversely, operations in other jurisdictions can either be disclosed on a Country-by-Country basis or on an aggregated basis (“Rest of World” reporting basis).

The information to be included within the PCBC Report is disclosed as follows:

• the names of each entity within the group;
• a description of the Group's approach to tax;
• the name of the jurisdiction (not relevant for the “Rest of World” reporting);
• a description of main business activities (not relevant for the “Rest of World” reporting);
• the number of employees (on a full-time equivalent basis) as at the end of the reporting period;
• revenue from unrelated parties;
• revenue from related parties that are not tax residents of the jurisdiction;
• profit or loss before income tax;
• the book value at the end of the reporting period of tangible assets, other than cash and cash equivalents;
• income tax paid (on a cash basis);
• income tax accrued (current year);
• the reasons for the difference between:
  • the income tax accrued (current year); and
  • the amount of income tax due if the income tax rate applicable in the jurisdiction were applied to the profit or loss before income tax  (noting that this item is not relevant for the “Rest of World” reporting).

PCbCR exemptions may be available to MNE groups where the disclosure of information in a PCbCR Report could compromise national security or where other circumstances justify relief from the reporting obligations. Full or partial exemptions may be granted by the Commissioner, who exercises discretion and assesses each application on a case-by-case basis. Detailed guidance on the exemption process is provided in Practice Statement Law Administration PS LA 2025/2 Public Country-by-Country Reporting Exemptions.

4. Pillar II compliance – GloBe Rules (Pillar Two)

Pillar Two was introduced to address the tax challenges arising from the digitalisation of the global economy. It seeks to ensure that MNE groups pay an appropriate level of tax in the jurisdictions in which they operate and generate profits. Broadly, Pillar Two imposes a top-up tax where the effective tax rate in a jurisdiction falls below the minimum rate of 15%.

• The charging provisions under the Pillar Two rules are:
  Income Inclusion Rule (IIR)
• Under Taxed Payments Rule (UTPR)
• Domestic Minimum Top-up Tax (DMT)

The Pillar Two rules apply to MNE Groups with annual consolidated  group revenue of at least €750 million (approximately $A1.2 billion) in 2 of the last 4 years preceding the current  reporting  period.  

Australia enacted the Pillar Two rules for income years commencing on or after 1 January 2024. The Income IIR and DMT apply from income years starting on or after 1 January 2024, while the UTPR applies to income years commencing on or after 1 January 2025.

For Australian Pillar Two reporting obligations, the Combined Global and Domestic Minimum Tax Return (CGDMTR) is required to be lodged with the ATO. The return is due for lodgement:

• 18 months after the end of the first fiscal year  IN which an entity becomes subject to Australian Pillar Two rules,; and
• Thereafter, 15 months after the end of the subsequent fiscal years

The CGDMTR includes the following :

• GloBe Information Return Notification– (GIR Notification)
• Australian IIR and UTPR Tax Return – (AIUTR)
• Australian Domestic Minimum Tax Return – (DMTR)

The Transitional Country-by-Country Safe Harbour Rules (TSH) have been introduced to MNE groups to significantly reduce their Pillar Two compliance obligations.  The TSH rules include the following three tests:

• De minimis test
• Simplified Effective Tax Rate test
• Routine profits test

The TSH rules set out that where one of the three safe harbour tests is satisfied, the MNE group’s jurisdictional top-up tax for the relevant jurisdiction for the fiscal year will be deemed zero, and the CGDMTR will be lodged as such. The TSH rules will be available to MNE groups for fiscal years up to and including the income year ended 30 June 2029.

There are several anti-avoidance provisions and other penalties that can apply to SGEs, as summarised below.

Multinational anti-avoidance law (MAAL)  

to certain schemes on or after 1 January 2016, irrespective of when the scheme commenced. It
is designed to counter the erosion of the Australian tax base by multinational entities using artificial or contrived arrangements to avoid attributing business profits to Australia through a taxable presence in Australia.

Broadly, the MAAL  applies  if under the scheme, or in connection with the scheme:

• A foreign entity supplies goods or services to an Australian customer
• An Australian entity, that is an associate of or is commercially dependent on the foreign entity, undertakes activities directly in connection with the supply
• Some or all of the income derived by the foreign entity is not attributable to an Australian permanent establishment
• The principal purpose, or one of the principal purposes of the scheme, is to obtain an Australian tax benefit or to obtain both an Australian and foreign tax benefit

The MAAL sits in Part IVA of the ITAA 1936, which is Australia’s domestic anti-avoidance legislation, and  is not affected by the operation of Australia’s double tax agreements.

Diverted profits tax (DPT)

The DPT came into effect for income years commencing on or after 1 July 2017 and is imposed at a rate of 40%. The
introduction of the DPT was designed to ensure that the tax paid by SGEs properly reflects the economic substance of their activities in Australia and aims to prevent the diversion of profits offshore through contrived arrangements.

Broadly, the new law applies if under the scheme, or in connection with the scheme:

• A taxpayer ('the relevant taxpayer') has obtained a tax benefit in connection with the scheme in an income year.
• A foreign entity, that is an associate of the relevant taxpayer, entered into or carried out the scheme or is otherwise connected with the scheme.
• The principal purpose, or one of the principal purposes of a person who entered into or carried out the scheme, is to enable the relevant taxpayer to obtain an Australian tax benefit or to obtain both an Australian and foreign tax benefit.
• There are some exceptions: namely, the $25m income test, the sufficient foreign tax test and the sufficient economic substance test. These should be explored in detail if DPT appears relevant to your business.

The significant increase in penalties applicable to SGEs is one of their biggest practical challenges. These changes include:

• Tax avoidance and profit-shifting scheme penalties are doubled.
• The penalty for making a false or misleading statement is doubled.
• Failure to lodge on time penalties have been multiplied by 500 times – a late lodgment of one day late can currently result in a penalty of AUD 182,00 increasing to  AUD 910,000 for a lodgement up to 113 days late.1

Given the harsh penalty regime in place for SGEs, it is important to ensure that they are addressing their Australian tax obligations in a timely manner. The increased penalties are not just restricted to late lodgement of GPFS and CbCR, but a number of the ATO lodgments including but not limited to:

• Income Tax Returns
• Fringe Benefits Tax Returns
• Business Activity Statements
• Instalment Activity Statements

SGEs should continue to review their internal processes to ensure they remain vigilant with their reporting obligations as the imposition of penalties could pose a serious financial risk. The ATO has previously been lenient to SGEs, however, these rules have now been in place for some time, and so we are now seeing these penalties being issued more frequently.

Given the additional rules that are applied to SGEs, it is important to inform your tax adviser of your SGE status or work with your tax adviser to determine your SGE status. External advisers often do not have access to the global structure of their clients, and as such it is important to raise this with your tax advisers at the outset if you are concerned about your SGE status. Importantly, any changes in your structure or business operations may result in a change to your SGE status and as such, this should be reviewed on an ongoing basis.

If you are considered an SGE, you should ensure that any ATO filings are lodged on time to avoid any late filing penalties being imposed. If you are an SGE that is also a CbCR entity, this would extend to the GPFS and CbCR filings as well.