Draft legislation to impact reporting requirements for SGEs

Treasury has issued a consultation paper (“Consultation Paper”) to amend the Taxation Administration Act 1953 (“TAA”) to require Country-by-Country Reporting parent entities (“CbCR Parent Entities”) to make available selected tax information in the public domain (“Public CbC Reporting”). 

Currently, CbCR Parent Entities are obligated to discharge confidential CbC reporting in accordance with Action 13 of the OECD’s Base Erosion and Profit Shifting initiative (“BEPS”) to the ATO, which may exchange the CbC Report (“BEPS CbC Reporting”) with other tax authorities pursuant to either a bilateral or multilateral instrument.

According to the Explanatory Materials (“EM”), the principal objective of the proposed amendments is to improve information flows to help investors and the public to compare entity tax disclosures to assess better whether an entity’s economic presence in a jurisdiction aligns with the amount of tax they pay in that jurisdiction.

The Consultation Paper recognises Australia’s commitment to honour the confidentiality obligations arising under its Tax Information Tax Exchange Agreements and the Multilateral Competent Authority Agreement, which prohibit the publication of any information disclosed in the BEPS CbC Reporting. As such, the Consultation Paper proposes a distinct and separate filing obligation. 

The draft legislation attempts to align the nature of the information with that required by the European Union’s public CbC reporting Directive (“EU Directive 2021/2101”) and the voluntary Global Reporting Initiative’s Sustainability Reporting Standards GRI 207: Tax (2019) (“GRI 207”).¹  However, there is additional information, such as the relevant group’s ‘approach to tax’, effective tax rate (“ETR”) in each jurisdiction, expenses from related party transactions in each jurisdiction and a list of intangible assets and their book value in each jurisdiction.

The Public CbC reporting will be provided to the ATO, who will, in turn, facilitate the publication on a website without any amendment or modification to any of the information. In the event the CbCR Parent Entities needs to make amendments owning to error, including following tax return amendments, the Commissioner of Taxation is expected to update the information on its website.

The reporting obligations apply for income years commencing on or after 1 July 2023. Further, non-compliance will result in penalties in accordance with Section 8E of the TAA.

Who would be required to file the Public CbC Reporting?

The new rule applies to a CbCR Parent Entity²  that: 

• Is a member of a CbC reporting group that is not individuals (but includes entities headed by a company, a trust or a partnership), and
• Is an Australian resident or a foreign resident with an Australian permanent establishment, and  
• Is not included in a class of entities or those specified under a relevant exemption. 

What information is required to be provided?

The EM refers to consistencies between the proposed information and those required under GRI 207 and BEPS CbC Reporting. As stated above, the additional information is a bespoke requirement under the proposed legislation. The table below compares the information items required by the BEPS CbC Reporting, the proposed Public CbC Reporting and those required by the EU Directive 2021/2101 and GRI 207. 

*The mark “✔️” represents a requirement, while the darker shade is used where the information does not have to be provided under the relevant regime. A lighter shading is used to convey some level, but not full, of comparability. For example, GRI 207 does not have a commentary regarding currency, while the proposed Public CbC Reporting, BEPS CbC Reporting and EU Directive require the currency to be specified. 

Potential implications for Australian taxpayers 

• Additional Compliance burden – while a large proportion of the information in the Public CbC Reporting is similar to the BEPS CbC Reporting and those required by the EU Directive 2021/2101 and GIR 207, the fact that the proposed filing obligation is a distinct and separate requirement means additional compliance burden. More importantly, information such as the CbC group’s approach to tax requires consistency with other documents, such as those provided under BEPS Action 13.    
   
• Greater exposure – the potential public relations implications from a greater exposure cannot be underestimated. Global groups need to appreciate the full scale of the consequence of the availability of such information in the public domain, which can be available to anyone with access to the Internet. Interestingly the EM alludes to the potential adverse implications to an organisation from greater exposure in justifying the rationale for the ATO to consider exemptions to government agencies based on “the application of this rule does not inappropriately affect [the government] entities”. The public relation impact from greater exposure cannot be underestimated. Groups may consider initiatives such as a review of their existing tax strategy and governance framework. The extent to which the tax strategy is broadly acceptable, adhering to widely accepted practices such as the arm’s length principle. The potential implications of disclosing certain commercially sensitive information, such as intangible assets by jurisdiction, including their book value, is significant. Disclosing entities could face substantial harm to their competitive position, particularly if their competitors are not subject to a similar regime. RSM note that, other than the EU, Australia’s other main trading countries, such as the US, China, and Japan, do not have in place, and are not contemplating, a similar level of disclosure.   
   
• Tight timeframe – given that the Public CbC Reporting applies to the income year commencing on 1 July 2023 with a filing within 12 months after the end of the income year, global groups need to act as soon as possible so that there is sufficient confidence at the senior executive level on the nature of the information that would be available in the public arena. Notably, Australia’s commencement date makes it a forerunner in implementing the disclosure regime. For example, whereas the EU started the process much earlier, the commencement date in Member States may be as late as the first financial year starting on or after 22 June 2024.
   
• Failure to lodge penalties – the draft EM states non-compliance penalty applies, and RSM anticipates failure to lodge penalties will apply under the increased penalty regime for significant global entities (“SGEs”). The current SGE penalty regime multiples the base penalty amount by 500 times and starts at A$137,500 for a late lodgement under 28 days, increasing progressively to A$687,500 if late by 112 days or more.

For further information

Please speak to your local RSM adviser for more details.

[1] GRI207 is published by the Global Reporting Initiative, an independent international organisation headquartered in the Netherlands.

[2] A CbCR Parent Entity is defined in Subdivision 815-375 of the Income Tax Assessment Act 1997. In summary, the definition of CbCR Parent Entity includes an entity that is not an individual, is not controlled by any other member of the CbC reporting group at the end of the period and has a global annual income of over A$1 billion.