The raft of measures that the Australian Tax Office (ATO) introduced as part of a global initiative to combat tax avoidance by large multinational groups have been in effect for almost two years and the first reporting deadlines fast approaching.
The provisions apply to Significant Global Entities (SGEs), which includes Australian subsidiaries forming part of a group where the global parent entity has turnover in excess of AU$1bn in a financial year. These measures require Australian SGEs to lodge three additional files with the ATO, namely, the CBC report, master file and local file.
The base position is that Australian SGEs are required to file all three reports (i.e. the CBC report, master file and local file) with the ATO, and they will only be relieved from filing the CBC report where the head entity has lodged the CBC report in a jurisdiction that has a tax-sharing arrangement in place with the ATO. An Australian SGE will remain obliged to lodge both the master and local file with the ATO.
Generally, a global parent entity will be responsible for preparing the CBC report and master file, with the local files prepared by each subsidiary in its relevant jurisdiction.
The top five priorities that Australian SGEs should consider over the coming months are:
1. Are you ready to meet your country-by-country (CBC) reporting obligations with the ATO?
You should confirm with your global parent entity:
- Is your global parent entity based in a jurisdiction that is subject to CBC reporting requirements?
- If so, what is the first year that these reporting obligations will apply to your global parent entity, and what is its lodgement deadline? If this doesn’t line up with the Australian reporting timelines you may be able to get an extension or exemption from the ATO – see below.
- Does the ATO have a tax sharing arrangement in place with the tax authorities in the jurisdiction of your global parent entity? If not, you may need to lodge the CBC report directly with the ATO.
- When will the country-by-country report and master file be finalised and made available to you?
2. Have you considered whether to apply for an exemption from CBC reporting, or approach the ATO to request an extension of time?
If your global parent entity is resident in a jurisdiction that has not yet implemented CBC reporting measures, you may qualify for an exemption from lodgement of the CBC report and master file.
If your global parent entity is resident in a jurisdiction that has implemented CBC reporting measures, an extension request should be sought where the lodgement deadlines of your global parent entity are not aligned with those imposed by the ATO if this will impact on your ability to meet the deadlines imposed by the ATO.
3. Have you discussed the requirement to prepare General Purpose Financial Statements (GPFS) with your auditors / accountants?
For financial years commencing on or after 1 July 2016, Australian SGEs that currently do not lodge financial statements with the Australian Securities and Investment Commission (ASIC), or only lodge special purpose financial statements with ASIC, are obliged to file GPFS with the ATO at the same time that the income tax return is due for lodgement.
The ATO has introduced a transitional administrative approach for income years that commenced between 1 July 2016 and 30 June 2017. This concession allows for Australian entities to provide consolidated GPFS prepared by the global parent entity in accordance with GAAP. Following the transitional administrative approach period, the ATO has indicated that Australian SGEs will not be able to provide consolidated financial statements prepared by the global parent entity, unless those consolidated financial statements are prepared in accordance with Australian Accounting Standards. As such, an Australian SGE (either on a stand-alone basis, or together with its subsidiaries based in Australia) will need to prepare and lodge GPFS with the ATO.
4. Have you implemented processes to ensure that tax return filings are lodged in time?
With effect from 1 July 2017, Australian SGEs will face a material increase in tax related administrative and failure to lodge penalties, ranging from A$105,000 for being one day late, escalating to A$525,000 where a return remains outstanding for 16 weeks or more.
Processes should be put in place to ensure that all Australian tax returns are lodged on time, and where unforeseen difficulties arise that may delay lodgement, an extension should be sought from the ATO before the relevant tax return is due.
5. Have you assessed the impact of the recent changes to the Reportable Tax Position (RTP) provisions?
A RTP schedule is a schedule to the income tax return, that requires large businesses to disclose their most contestable and material tax positions. The ATO has extended the obligation to lodge an RTP schedule to companies in economic groups with turnover greater than A$250 million. This change will apply for income years ending on or after 30 June 2018.
Based on guidance provided by the ATO, a company will only be obliged to file a RTP schedule as a result of the above changes if it is notified by the ATO in writing (including email).
The RTP schedule will be used by the ATO to assess the tax risk of large businesses and identify those requiring further review or audit. The RTP schedule is treated like a tax return, so a failure to lodge a RTP scheduling, or lodging an incomplete or inaccurate RTP schedule, can expose the business and the public officer to penalties.
Large businesses are under increased scrutiny by the ATO, and high levels of ATO review and audit are expected in the coming years. William Buck can assist you in meeting your additional reporting requirements, but more critically, can help identify the key areas of tax risk for your business and put in place strategies to manage these risks.