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05 August 2024 Australian public country-by-country reporting Bill progress update
The Senate Economics Legislation Committee's (SELC) recommendation in its report dated 2 August 2024, that Parliament pass a Bill1 that includes the proposed Australian public country-by-country reporting measures (PCbCR), has moved these measures another step closer to reality. Australia's PCbCR requires certain large Australian groups and Australian and foreign-owned multinational enterprises (MNEs) to prepare certain information on a country-by-country (CbC) basis for public release by the Australian Taxation Office (ATO) for the 2024/25 and later financial years.2 Australia's public CbCR regime will be the most comprehensive PCbCR regime globally and additional work will be required by covered groups to comply compared to disclosures for confidential CbCR and under the European Union (EU) PCbCR directive. Significant administrative penalties may apply for late lodgment and criminal penalties may apply for noncompliance in some circumstances. The measures are part of the Government's Multinational Tax Integrity and Transparency Plan announced in the 2022-23 Federal Budget (following its election commitment). They follow the new financial statement additional disclosure of subsidiary information measures — including the obligation to disclose a subsidiary's tax residence — that Australian public companies must satisfy, applicable from the 2023/24 year. The SELC's report following its inquiry into the Bill was published on 2 August 2024. The Bill was introduced in Parliament on 5 June 2024 and is currently before the Senate. After considering submissions, the SELC concluded that the PCbCR (and the other Bill measures) should be passed as introduced. The Bill includes a limited number of changes from the second exposure draft issued in February 2024. In particular, unchanged aspects include the information to be disclosed, the compulsory use of statutory financial statements and the commencement date. The proposed rules are very wide in scope and will require careful review by affected groups to determine their application and potentially significant work to ensure systems are in place to comply with these new reporting obligations. Notwithstanding the timeline for providing the first reports (i.e., for financial reporting periods starting on or after 1 July 2024), groups must understand now if they will be subject to the disclosures and should start implementing systems to capture and report the required information, which will potentially involve teams across multiple jurisdictions, before the end of the first reporting year.
The new legislation applies to the ultimate parent entity (the CbC-reporting parent) of MNEs and purely domestic Australian groups that have annual global consolidated income (i.e., revenue) in excess of AU$1b in the previous year, where:
The CbC-reporting parent must be either a constitutional corporation or a partnership whose partners are constitutional corporations or a trust of which all trustees are a constitutional corporation. A constitutional corporation includes an Australian or foreign corporation. The lodgment obligation applies to the CbC-reporting parent (i.e., the global parent entity in most instances) regardless of whether that entity is Australian or foreign. The explanatory memorandum (EM) to the Bill makes clear that the Bill is intended to apply to Australian groups with no foreign activities. Definitions of CbC-reporting parents and CbC-reporting groups come from the existing law for the confidential subdivision 815-E ITAA Income Tax Assessment 1997 CbCR rules. The definitions widen the application of the rules, including to a "notional listed company group," and require careful consideration. The requirements continue to apply to entities that are below the CbCR threshold in their home jurisdiction, but above the Australian threshold. Accordingly, some organizations that do not currently have any CbCR requirements anywhere in the world will have to prepare all information from scratch. There may be administrative guidance issued by the ATO on this matter. Reporting only applies to groups that have more than AU$10m in Australia-sourced income as part of their aggregated turnover for the current year. Australian-sourced income is not defined in the tax law; therefore, a facts-and-circumstances analysis of the income of group entities and relevant evidence will be required to claim the exception. The calculation of aggregated turnover includes the annual turnover of the entity and its connected entities and affiliates with various exclusions. The legislation allows the Commissioner to exempt classes of entities, as well as specific entities, from providing some or all information. The law also allows for government entities to be exempted in some circumstances (as such, entities may be subject to alternative government disclosure or accountability regimes). The EM includes new guidance on when it may be appropriate for the Commissioner to grant exceptions, including where information disclosure would breach Australian or foreign laws or reveal commercially sensitive information. Importantly the exemption will only apply to a single period and groups will need to reapply for further exemptions each year. The ATO will need to develop guidance on how groups can apply for exemptions and in what circumstances they may be granted.
A draft instrument, issued in February 2024, includes a list of 41 specified jurisdictions, which the draft EM stated were selected because they are typically associated with tax incentives, tax secrecy and other matters likely to facilitate profit-shifting activities. The list also broadly aligns with the list of jurisdictions covered by the International Dealings Schedule to the company income tax return. The list includes various "tax havens," as well as some main trading partners, such as Hong Kong, Singapore and Switzerland. The list excludes Cyprus, Ireland, Luxembourg and the Netherlands as they are in the EU and may be subject to the EU PCbCR. A final instrument list is not expected until after the law is enacted. While comments in the EM to the Bill list some additional factors which will be considered in finalizing the list, the list is not expected to change substantially from the draft. The specified jurisdictions overlap to a certain extent with the EU Annex I (black) and Annex II (grey) lists (e.g., a number of "tax havens" are on both lists), but there are also differences. For instance, Hong Kong, Singapore and Switzerland only appear on the Australian PCbCR list and other countries, such as the Russian Federation, only appear on the EU lists. (The full draft list of specified jurisdictions is set out in the appendices at the end of this Alert. Quantitative data must be sourced from audited consolidated financial accounts of the CbC parent for the reporting period or, if none exist, from equivalent statements that would have been prepared had it been a listed company.
Additional requirements may be added by regulation (e.g., if an additional requirement was added to the GRI 207 standard).
Two sets of penalties may apply for failure to comply with the new disclosure requirements. The ATO will likely provide guidance in due course concerning how they will seek to apply these penalties and any circumstances where they might be remitted. On a prima facie basis, the penalties apply to the CbC-reporting parent. There is some uncertainty how the ATO will seek to collect penalties from CbC-reporting parents that do not have a direct presence in Australia and ATO guidance is expected. A new specific penalty provision applies for providing the PCbCR information late. The penalties are 500 penalty units (AU$165,000 at proposed new rate of $330 per penalty unit3) per part of 28 days late up to a cap of 2,500 penalty units (AU$825,000 at proposed new rate). These penalties also apply if material errors are not reported to the Commissioner for correction within the required 28 days. The Bill introduces new paragraph 8C(1)(ab) into the Taxation Administration Act 1953 that makes failure to publish the required PCbCR disclosures in the prescribed manner a criminal offence. Conviction would require the Commissioner of Taxation to prosecute in court and carries a maximum fine of 20 penalty units for a first-time offender (AU$6,600 at proposed new penalty unit rate), up to 50 penalty units (AU$16,500 at proposed new rate) for a third-time offender. Note that criminal penalties also may be imposed for third-time offences. There is currently no provision for additional voluntary disclosures that may be needed to help readers understand the information published; for example, the reasons why a particular jurisdiction may appear to have a low tax burden may not be apparent from what the ATO publishes (e.g., from carryforward tax losses, home-country controlled foreign company (CFC) or Pillar Two pickup elsewhere). Groups may therefore want to consider their own additional forms of contemporaneous disclosure to better inform stakeholders. Reporting entities should expect scrutiny of their PCbCR by the public, media and non-governmental organizations (NGOs) — including comparisons of various PCbCR lodgments and other public financial information looking for inconsistencies. As a result, it will be critical for covered entities to take a coordinated approach to their PCbCR requirements across jurisdictions. The Bill is in the Senate, which next sits from 12 August to 22 August 2024. It is unclear when the Bill might be passed and there is a risk that passage could be delayed by concerns with other unrelated proposals in the Bill. Notwithstanding the SELC's recommendations, further amendments can still be made before the law is enacted. Given the far-reaching effects, including the extraterritorial effect and the significant additional requirements, groups should start preparing for the new rules based on the current Bill.
Document ID: 2024-1499 | ||||||||