This article provides a summary of the released exposure draft legislation on Public country-by-country reporting (the proposed rules) to improve corporate tax transparency disclosures. The proposed rules require Country-by-Country (CBC) reporting entities to publicly disclose information on the group’s tax affairs.
On 6 April 2023, Treasury released Exposure Draft Legislation on Public country-by-country reporting (the proposed rules) to improve corporate tax transparency disclosures. The proposed rules require Country-by-Country (CBC) reporting entities to publicly disclose information on the group’s tax affairs.
The proposed transparency measures represent a significant divergence to the existing CbC reporting obligations, where the information provided and shared between revenue authorities across the world remains confidential. It does however, follow a general movement for greater transparency with the wider public regarding the tax affairs of multinational companies, in the Global Reporting Initiative 207 and European Union’s public CbC reporting directive.
If enacted, the proposed rules will apply to income years commencing from 1 July 2023 and penalties may apply to Australian resident entities for refusing or failing to publish the required tax information.
Tax information required to be reported
The proposed rules require the CBC reporting parent to publish selected tax information relating to itself and its CBC reporting group including:
- Names of each entity in the CBC reporting group
- Description of main business activities
- Number of employees
- Revenue from related and unrelated parties
- Expenses from related party transactions
- Profit and loss before income tax
- List of tangible and intangible assets (including their value)
- Income tax paid (on cash basis)
- Income tax accrued (current year)
- Effective tax rate
- Reasons for any difference between income tax accrued and due
- Currency used in calculating and presenting the above information.
Controversial additional disclosures unique to Australia’s approach
The disclosures outlined above have largely been adopted from and are consistent with GRI 207, with three notable additions being the following:
- Effective tax rates
- Expenses from related party transactions
- List of tangible and intangible assets.
The abovementioned additional disclosures are viewed as indicators of corporate governance risk, and therefore complementary to the GRI 207 disclosures.
Nonetheless, these disclosure items that are only required for disclosure in Australia, could be viewed as controversial. This is because it requires the CbC reporting parent to prepare and lodge these disclosures and the effort may be viewed as onerous and disproportionate to the benefit gained by members of the public in understanding the tax affairs of large multinational companies.
Where relevant, the selected tax information published by the reporting entity must be sourced from audited consolidated financial statements and must be published within 12 months after the end of the income year to which it relates.
Entities that must report tax information
The proposed rules will apply to entities that are a ‘CBC reporting parent’ and this includes companies, trusts or partnerships.
The CBC reporting parent is required to report where they are a CBC reporting parent for the income year and at any point during that year, they, or a member of the group, is an Australian resident or foreign resident with an Australian permanent establishment. The definition largely ties in with the Significant Global Entity (SGE) definition.
The Commissioner may exempt entities from this requirement in writing or may specify a class of entities as excluded by legislative instrument or regulations.
Publication of tax information
The CBC reporting parent will fulfil its requirement to publish tax information by providing the information to the Commissioner in an approved form, which is yet to be published, and therefore given the imminent start date there is uncertainty regarding how the CbC reporting parent will address these obligations. The Commissioner is required to make the information available on an Australian government website.
Proposed start date
The Exposure Draft Explanatory Memorandum (EDEM) and the original government announcement both indicate that the proposed rules will apply to income years commencing on or after 1 July 2023, while the Exposure Draft Legislation states that the 2023-24 income year is the commencement year. This difference creates uncertainty as to the start date for early substituted accounting period (SAP) entities. We would hope this issue will be resolved before the draft Bill is finalised.
For entities with regular accounting periods ending 30 June, these new rules would start on 1 July 2023. For entities with a SAP the first income year to which these requirements apply will be the first year commencing after 1 July 2023 (this is assuming the EDEM has the correct start date). For example, for a client with a SAP ending 31 December, the first income year to which these requirements will apply will be the year commencing 1 January 2024.
Disclosures are required to be provided to the Commissioner within 12 months after the end of the income year (i.e. this means the first disclosures will need to be provided by 30 June 2025).
There are a range of existing general offences and administrative penalties that can apply for non-disclosure of tax information. The proposed rules will amend Section 8C of the TAA 1953 to ensure it applies to the proposed public transparency measures. A failure to adhere to the proposed rules by the due date may result in penalties, with fines starting from $5,500 for a first offence and in circumstances of multiple offences, could result in imprisonment of responsible personnel. Where a taxpayer is prosecuted under Section 8C of the TAA 1953, the administrative penalty regime in Section 286-75 of Schedule 1 of the TAA 1953 does not apply to further penalise the taxpayer.
Although not explicitly addressed under the proposed rules, the CbC reporting parent should be aware of the existing penalty regime for Significant Global Entities where penalties for late lodgement is multiplied by a factor of 500 and based on rates applicable at the day of writing range from $137,500 to $687,500.
With the start date of the proposed public transparency measures looming, taxpayers should familiarise themselves with the requirements, and where applicable, prioritise planning their approach to compiling and presenting the information required.
In responding to the CBC reporting requirements, taxpayers should be well placed to review their tax and corporate governance processes, including delegations for review and approval of the financial and tax information. This is particularly important when publishing information to ensure not only accuracy but that the information is adequately explained to prevent misinterpretation when disclosed to the public.
BDO expects that some practical challenges will arise, particularly for disclosure items that are required in Australia for public disclosure but not required for reporting overseas. For example, the description of a group’s ‘approach to tax’ and ‘valuing intangible assets’ may not be required or reported in the financial statements overseas and therefore, represent a challenge for taxpayers to prepare and publicly disclose this information, including obtaining the necessary internal approvals from overseas management and stakeholders.
BDO recommends that taxpayers are proactive in this regard and plan their approach to addressing the proposed transparency measures.
Contact one of BDO’s specialists or your regular BDO contact to discuss the above and the relevant implications for your organisation.