In the October 2022-23 Federal Budget, the Australian Government announced its intention to implement public CbC reporting measures to enhance transparency, and improve comparability and accessibility of tax information.  

The Government has now released draft legislation that, if enacted, requires the relevant CbC reporting parent to provide selected tax information relating to its CbC reporting group for public release. The information to be published relates to presence and tax dealings of members of the CbC reporting group across jurisdictions and should enable investors, customers, and regulators to create a picture of how the entity structures its tax affairs in Australia and globally. 

The proposed measures would be the first unrestricted mandated public reporting of a broad coverage of worldwide tax related data by jurisdiction.   

While some European countries have started to require taxpayers to publish tax information, the level and amount of disclosures required in Australia is out of step.  In effect, the proposed measures will bypass Australia’s international obligations under OECD’s BEPS Action 13 which emphasise confidentiality.   

Entities covered by the amendments 

Entities required to report are those that are classified as a CbC reporting parent, where at least one member of the CbC reporting group is an Australian resident or a foreign resident with an Australian permanent establishment. The obligation will fall on the CbC reporting parent, which will often be a foreign entity. 

The Commissioner may in writing exclude specific entities from having to publish tax information of a particular kind. 

Information to be published 

Much of the required information is the same as that already provided under the existing confidential CbC reporting rules. The additional information that will need to be disclosed includes: 

• a description of the CbC reporting group’s approach to tax 
• in respect of each jurisdiction in which the CbC reporting group operates, the following information for the income year, at a group level: 
• expenses arising from transactions with related parties that are not tax residents of the jurisdiction 
• a list of tangible and intangible assets as at the end of the income year, and the book value of those assets  
• effective tax rate.  

Regulations may prescribe additional information to be disclosed. 

The information to be disclosed is generally required to be sourced from audited consolidated financial statements, to ensure that the material is reconcilable and verifiable. 

How information needs to be published 

Public CbC reporting information will need to be provided to the Commissioner, who will facilitate publication on an Australian Government website.  

Any errors identified should be reported to the Commissioner, who will be responsible for making the information available on an Australian Government website (presumably the same one on which the originally lodged data is to be displayed). 

Application date 

The new disclosure rules are expected to apply to the 2023-24 income year onwards.  

The application date for groups with substituted accounting periods (SAPs) is currently unclear. The present legislative wording indicates that the public reporting rules could potentially apply to year of income ending 31 December 2023, with filings required by 31 December 2024. Other parts of the draft materials, however,indicate the rules will apply only to income years commencing on or after 1 July 2023. The effective date for groups with SAPs will need to be clarified during the legislative process. 

The timing of annual submissions is the same as for the confidential CbC reporting which is within 12 months of year end. 

Penalties for non-compliance 

Failure to comply the Public CbC reporting measures will be subject to penalties, determined under the Significant Global Entity (SGE) penalty regime.  

Concerns that this reporting obligation brings 

Our initial thoughts on the main concerns that this additional reporting obligation brings are detailed below. 

• The tax risk management and governance processes in place should clearly outline the CbC reporting group’s approach to tax. 
• The reporting will require consideration of the level of confidence that an entity has in the validity and accuracy of data. 
• It will be necessary to ensure that tax disclosures for all members of the CbC reporting group are aligned. 

• Management and the Board will need to agree the process to be used to extract and collate information, and to review and approve materials prior to submission. 
• The public release of the information will allow for more external analysis and questions surrounding where profits are made and where taxes are paid. 
• Ultimately this could help to inspire public confidence and support from investors, customers, and regulators, but could also result in reputational risk, in the event that negative inferences are drawn from the materials released. 

Releasing the requested information publicly could result in data that would otherwise be considered ‘commercial in confidence’ becoming available to competitors, and cause commercial impacts that may outweigh the benefits of the additional tax transparency. This could result in financial losses, quite apart from the administrative burden anticipated in putting this additional reporting in place, and could potentially drive foreign investors away from Australia.   

In addition, the proposed timeframe is far from sufficient for taxpayers to fully understand the implications, communicate/educate foreign jurisdictional parents, and set up necessary reporting systems to meet the onerous compliance reporting requirements. 

How SW can help 

SW will be monitoring announcements and will keep you updated as more information becomes available. 

Our tax experts can assist with: 

• determining the impact of the measures on your group 
• analysing the additional information (e.g. approach to tax, effective tax rate) in your unique circumstances and advising on how best to prepare for the additional disclosure requirements 
• developing a process that can help you manage compliance with the onerous reporting requirement 
• communicating with your foreign CbC reporting parent and relevant stakeholders. 

Please reach out to the Key Contacts here, or your SW contact, if you would like to know further. 

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Whilst the important details of the framework have yet to be released (and remain the subject of an intended consultation process), the Albanese Government’s intention is to “to ensure multinationals pay their fair share of tax“.

The Government plans to do this via 4 major areas of reform or expansion:

1. implementation of BEPS 2.0
2. modification of thin capitalisation rules
3. restricting Intellectual Property deductions, and
4. expanding Tax Transparency measures, including requiring:
   • public release of Country-by-Country (“CbC”) information
   • a public registry of ultimate beneficial ownership of entities
   • mandatory reporting of “tax haven exposure”, and
   • transparency requirements for Australian government tenderers.

Adoption of BEPS 2.0

The ALP has confirmed its commitment to the timely implementation of the Base Erosion and Profit Shifting framework (BEPS 2.0) to follow through on Australia’s agreement to the global arrangement reached in October 2021 and membership of the OECD’s Inclusive Framework.

This will include the domestic implementation of what is known as a 2-Pillar solution, which includes:

• a global minimum effective minimum corporate tax rate set at 15% for multi-nationals, and
• a fairer distribution of profits by multinationals.

The new Government is clearly hoping that the introduction of these measures will increase Australia’s proportion of the tax take on many multinationals.

Thin capitalisation reform

The ALP is proposing to further limit interest deductions to bring Australia in line with the OECD recommended approach. In particular, the Government is proposing to limit interest deductions to 30% of EBITDA from 1 July 2023, while retaining the arm’s length and worldwide gearing debt tests.

The proposed reform is simple in statement but difficult in execution, and will likely have significant impact on a range of sectors that are traditionally highly leveraged and increase the compliance burden for many multinationals.

Thankfully, the ALP has stated that these reforms will only proceed after industry consultation, and we hope that due consideration is given to the broader implications of such a change.

Intellectual Property restrictions

The Government has seemingly sought to ‘borrow’ certain integrity measures from other tax systems such as the UK and US in seeking to deny tax deductions for the use of intellectual property when those payments are paid to a tax haven jurisdiction.

These measures are intended to only apply to Significant Global Entities (SGEs) and are intended to stop “treaty shopping”. The Government intends to introduce provisions that would deny such a payment unless it could be substantiated that the royalty payment was not for the dominant purpose of avoiding Australian tax.

There are many complexities evident with this proposal, not the least the interaction of these proposed rules with existing tax provisions such as Part IVA and Diverted Profits Tax.

Tax Transparency expansion

The remainder of the ALP’s reform agenda is focused on expanding requirements for multinationals to be transparent in their dealings.

These expansions focus on 4 areas:

Public reporting of CbC information

It is currently only mandatory to provide CbC Reporting information to the ATO. The ATO then shares that information with certain other global revenue authorities.

The ALP intends to require “large multinational firms” (presumably SGEs) to publicly disclose the CbC information.

Ultimate beneficial ownership information

The Government intends to create and maintain a public registry of ultimate beneficial ownership. Ultimate beneficial ownership is essentially the identity of who ultimately owns, controls, or receives profits from a company or other type of entity.

Implementation of a public register of such information will bring Australia in line with other G20 nations such as Canada, UK, and the US.

We expect that such a register would be limited in scope to large multinationals given the broader context of the reform agenda. However, limited information has been provided at this stage.

Mandatory reporting of “tax haven exposure”

Presumably tied to the implementation of BEPS 2.0, these changes will require multinationals operating in jurisdictions below the proposed global minimum 15% tax rate to disclosure a “material tax risk” to shareholders.

Tax transparency requirements for Australian Government tenderers

Lastly the ALP plan to implement a “Fair Go Procurement Framework” requiring companies tendering for Government contracts worth more than $200,000 to disclose their country of domicile for tax purposes.

ALP plan needs broad consultation

The ALP’s proposals clearly represent a significant pivot from policies in previous elections and have generally focused on ways of addressing tax avoidance by multinational corporations. Whilst they may provide some headaches and uncertainties for taxpayers, they are unlikely to unsettle Australian voters or mums and dads.

Nonetheless, the potential application of the reforms are significant and may impact many small and medium sized enterprises – as well as the SGEs. We welcome the opportunity for broad consultation to ensure that the plan achieves its objectives in an appropriate and measured way.

Contributors

Jae Debrincat

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