Tax Insight - Another public tax reporting obligation

Treasury has released for consultation an Exposure Draft of new rules which will require multinational groups with an Australian presence to publish information about their tax and financial position for all the jurisdictions in which the group operates. Submissions on the Exposure Draft are due by 28 April 2023.

1. Background

The Exposure Draft just released is the latest development in the campaign being waged in Australia and around the world to deploy publicity as a tool to discourage tax avoidance by MNEs.

Australia already has legislative regimes which encourage or require entities to report information about their tax affairs to the public:

• in February 2013, the Assistant Treasurer announced that the Government would legislate “to improve the transparency of Australia's business tax system,” an announcement which led eventually to the annual ATO Report of Entity Tax Information; and
• in May 2015, the Treasurer commissioned the Board of Taxation to develop a Voluntary Tax Transparency Code to encourage large multinationals to disclose tax information.

While these measures were being legislated, many large taxpayers decided to act unilaterally and began publishing a report on taxes paid around the world as part of their suite of annual reports.

Meanwhile, the OECD was working on item 13 of the BEPS Action Plan. The Final Report on Action 13, released in October 2015, required large groups to prepare a country-by-country report with aggregate data on income, profit, taxes paid and economic activity in each of the jurisdictions in which the group operates. This data would be shared with the tax administrations of various jurisdictions on a confidential basis. These requirements were legislated in Australia with effect from 2016.

But apparently, these measures were seen as insufficient:

• the ATO Tax Information Reports and reports under the Voluntary Tax Transparency Code are publicly accessible but they focus on Australian tax;
• a taxpayer’s own tax and financial reports are not mandatory, and reported data is selected by the group, making comparisons between groups difficult;
• country-by-country reports are more granular and uniform, but they are only shared between revenue authorities and (by design) are not publicly available.

Consequently, in the lead up to the 2019 election the ALP promised, “to introduce public reporting of country-by-country reports, ensuring the release of high-level tax information about where and how much tax was paid by large corporations ...” This proposal was repeated for the 2022 election with a promise to introduce, “transparency measures including reporting requirements on tax information, beneficial ownership [and] tax haven exposure …”

In August 2022, Treasury released a Consultation Paper, Government election commitments: Multinational tax integrity and enhanced tax transparency seeking submissions on several transparency measures including:

• mandatory reporting of material tax risk to shareholders of Australian public companies (an Exposure Draft of amendments to the Corporations Act to give effect to this measure was released in mid-March); and
• public reporting of information drawn from country-by-country reports (which is the focus of this Exposure Draft).

This Exposure Draft is the next step in this process. It is meant to lead to standardised tax and financial information, being collected by the ATO and then made freely available to the public worldwide, detailing a group’s worldwide operations disaggregated for each jurisdiction.

2. The new requirements

Who is affected

The obligation to report information to the ATO is imposed on the parent entity of a country-by-country reporting group required to prepare a country-by-country report, provided the parent is an Australian resident, some member of the group is a resident, or a member of the group has a PE in Australia. The references to the country-by-country reporting rules will link the measure to definitions already set out in the transfer pricing rules and will limit the measure to large multinational groups.

Foreign parent companies will have to report to the ATO if they have subsidiaries or branches in Australia.

The obligation extends to parent entities which are trusts if they have a corporate trustee and to partnership if all the members are corporations.

An exception is available for government-related entities, and the ATO has the power to exclude individual entities and classes of entities.

What to report

An affected entity is obliged to report the itemised information, “in respect of each jurisdiction in which the country-by-country reporting group operates.” The data is thus aggregated for all entities operating in the same jurisdiction to mirror the reporting requirements of the country-by-country report.

While the Exposure Draft alludes to the existing country-by-country reporting regimes, the information which must be reported is more extensive than country-by-country reports require and so cannot be drawn directly from a group’s report. Rather, the legislation lists particular pieces of information which must be reported, and says the information, “must be based on amounts as shown in the audited consolidated financial statements [of the parent entity] …”

The required information includes:

• a description of group’s main business activities in each jurisdiction;
• the number of people employed in the jurisdiction as at the end of the income year;
• the book value of tangible and intangible assets at the end of the income year, other than cash;
• the gross revenue from transactions with unrelated parties, as well as the revenue and expenses from transactions with related parties (if they are not resident in the same jurisdiction);
• the profit or loss before income tax, the income tax actually paid and any income tax expense accrued for the current year;
• a calculation of the effective tax rate and an explanation of the difference (if any) between the tax expense accrued and the tax that would payable if profit before tax was liable to “income tax [at the] rate applicable in the jurisdiction”; and
• the currency used in the report.

In addition to the granular information, the Exposure Draft requires the parent to provide, “a description of the … group’s approach to tax.” This concept already appears in the voluntary Tax Transparency Code, and reports usually say things like, “we are committed to complying with all relevant tax legislation; we will not adopt tax positions that are considered aggressive; we will work co-operatively and openly with relevant tax authorities …” and so on. Reports under the new regime will likely say much the same thing.

An entity must notify the ATO of corrections if it becomes aware of errors in the original report.

How to report

The Exposure Draft goes through a curious charade. The obligation is imposed on an affected entity to “publish” the information required by the amendment, but an entity can publish the information only by giving, “a document containing the [required] information to the Commissioner in the approved form.” The Commissioner then makes “the information in the document available on an Australian government website.”

When to report

An entity affected by the measures has up to 12 months after the end of the income year to give the required information to the ATO, although there is a power for the ATO to vary this time limit, presumably for groups with later country-by-country reporting deadlines.

Corrections must be notified to the ATO “as soon as practicable” after the entity becomes aware that its original document contains an error.

Penalties

The Exposure Draft proposes amending the Taxation Administration Act 1953 to add a new strict liability offence where an affected entity fails to comply with its obligation to give the information to the ATO in the required manner. Just how this penalty would be enforced against a non-resident parent is not obvious, but the issue is unlikely to arise.

3. Comment

The result of the process looks very much like the ATO is collecting information about the worldwide operations of MNEs from country-by-country reports, and then publishing it to the world. The Final Report on BEPS Action 13 insists:

Tax administrations should take all reasonable steps to ensure that there is no public disclosure of confidential information … and other commercially sensitive information contained in the [country-by-country documents and] should also assure taxpayers that the information presented in transfer pricing documentation will remain confidential.

The Exposure Draft acknowledges that the information in the country-by-country report is subject to strict confidentiality and cannot be publicly disclosed.

So the Government attempts to sidestep this obligation by simply requiring companies to provide the information in a “separate public reporting obligation”. No doubt this two-step charade [the entity publishes its own information; the ATO just helps out], and the statement that the information uses amounts shown in the audited consolidated financial statements, is meant to convince other governments that the ATO is not simply publishing the contents of country-by-country reports, in breach of the secrecy obligations. One suspects, other governments may see things differently.

4. Dates

Submissions on the Exposure Draft are due by 28 April 2023.

If enacted in its current form, the measure would require taxpayers to report to the ATO information about income years starting from 1 July 2023.