Over the last four years, the Australian Government has introduced various tax laws targeting Significant Global Entities (“SGE”). The SGE amendments, which include special reporting obligations and integrity measures, aim to improve transparency and encourage large multinational enterprises to pay their fair share of tax on profits earned in Australia. This article will only address the additional reporting obligations for SGEs.
Broadly, an SGE is either of the following:
- An entity with an annual global income of AU $1 billion or more; or
- An entity that is a member of a group of entities with an annual global income of AU $1 billion or more.
An SGE is not limited to a company or corporate tax entity. An SGE includes any entity meeting the above requirements and can include trusts, partnerships, and superannuation funds. From July 1, 2018, the definition of an SGE was expanded to include members of a large group headed by private companies, trusts, partnerships or investment entities. It is also important to note that a purely domestic entity or group can be an SGE.
From an Australian reporting perspective, two additional requirements apply to SGEs as follows:
- General purpose financial statements (“GPFS”) obligations – Applies to income years commencing on or after July 1, 2016; and
- Country-by-Country (“CbC”) reporting obligations – Applies to income years commencing on or after January 1, 2016.
The abovementioned reporting obligations apply to an SGE that is an Australian resident for tax purposes, or a foreign resident that operates a permanent establishment (“PE”) in Australia.
Failure by an SGE to file a GPFS or CbC report on time with the Australian Taxation Office (“ATO”) can attract penalties ranging from AU$105,000 to AU$525,000 per statement.
- Financial reporting obligations
For income years commencing on or after July 1, 2016, an Australian SGE is required to prepare GPFS in accordance with Australian Accounting Standards (or in some limited cases, Commercially Accepted Accounting Principles (“CAAP”)) and file the GPFS with the ATO by the due date of the relevant Australian income tax return. A copy of the GPFS will be given to the Australian Securities and Investments Commission (“ASIC”), Australia’s corporate regulator, and will be made available to the public.
CAAP generally refers to International Financial Reporting Standards (“IFRS”) or accounting standards that are IFRS compliant (such as Australian Accounting Standards) and the United States of America generally accepted accounting principles (“GAAP”).
The following Australian entities that are SGEs now need to file GPFS with the ATO:
- Small foreign controlled companies that are not currently required to file financial reports with ASIC as they are not part of a large group in Australia;
- Entities currently filing Special Purpose Financial Reports (“SPFR”) with ASIC;
- Grandfathered large proprietary companies that are exempted from filing financial statements with ASIC; and
- Corporate limited partnerships and trusts that are not currently required to file financial statements with ASIC.
Administrative relief and exemption
Transitional relief was available for one income year which commenced between July 1, 2016 and June 30, 2017. During this transitional period, Australian entities were able to submit the consolidated financial statements of their Global Parent Entity (prepared in accordance with the CAAP of their country) instead of having to prepare and file a GPFS for the Australian entity. However, this transitional relief is no longer available for income years commencing from July 1, 2017 onwards.
Australian companies that are currently already filing GPFSs with ASIC will be exempted from filing GPFSs with the ATO.
A small foreign owned Australian subsidiary (“AusSubCo”) which is not part of a large group in Australia is currently exempted from filing financial statements with ASIC in accordance with ASIC Legislative Instrument 2017/204. The Global Parent Entity (“ParentCo”) has a global turnover greater than AU$1b. The accounting year for both entities ends on December 31. This example is depicted in the diagram below:
As ParentCo has an annual global income of more than AU$1b, AusSubCo is considered an SGE. From January 1, 2017 onwards, AusSubCo is required to prepare a GPFS in accordance with Australian Accounting Standards and file it with the ATO before the due date of the relevant Australian income tax return. AusSubCo can apply transitional relief and submit the consolidated financial statements of ParentCo to the ATO for the year ended December 31, 2017. However, AusSubCo will need to prepare its own GPFS in accordance with Australian Accounting Standards from January 1, 2018 onwards.
- CbC reporting obligations
For income years commencing on or after January 1, 2016, an SGE is required to provide three reports (i.e. a CbC report, Master File and Local File) to the ATO within 12 months after the end of the income year. The information obtained from the above reports will assist the ATO in conducting a transfer pricing risk assessment and potentially a transfer pricing audit. It is important to note that the CbC reporting obligations do not replace the existing transfer pricing documentation obligations.
The table below provides an overview of the information required in each relevant statement:
|Report||Details included in each statement|
(Prepared and filed by Global Parent Entity)
|Provides information about the global allocation of the multinational enterprise’s income and tax paid.|
(Prepared globally and filed locally)
|Provides a high-level overview of the multinational enterprise in relation to:
o Organizational structure.
o Business operations and activities.
o Financial arrangements.
o Financial & tax positions.
(Prepared and filed locally)
|Long Form Local File Part A
o Information about the local Australian entity’s management structure, activities and international related party dealings (“IRPD”).Long Form Local File Part B
o Provide copies of agreements for the IRPDs shown at Part A and information relating to those transactions.
|Short Form Local File
o In certain circumstances, a short form Local File (instead of the full Local File Part A & B) can be filed with the ATO. For example, entities with IRPDs less than AU$2m, entities with revenue less than AU$25m, or entities with IRPDs representing less than 2.5% of their turnover.
o A short form Local File is a simpler version of the Long Form Local File providing high-level disclosures of the organisational reporting structure, business, strategy, business restructures, transfer of intangibles and key competitors.
Administrative Relief – CbC Report
An Australian entity may also qualify for administrative relief from lodging the CbC Report in certain circumstances. For example, where the global parent entity has an obligation to lodge a CbC Report in the foreign jurisdiction which has an international agreement with Australia for automatic exchange of information. If administrative relief applies, the Australian entity will not need to request an exemption from the ATO.
An Australian entity may be able to apply to the ATO for exemption from lodging the CbC Report, Master File and/or Local File in certain circumstances. Some examples of circumstances where the ATO may grant exemption include:
- Another entity in the global accounting group has an obligation to file a CbC Report and Master File outside of Australia.
- The Australian entity does not have any international related party dealings.
The ATO will assess an SGE’s eligibility for exemption on a case by case basis.
Following on from example 1 above, a small foreign controlled Australian subsidiary will be required to lodge a Master File and a Local File with the ATO (unless it obtains an exemption from the ATO). The ATO will be able to obtain the CbC report from the foreign tax authority under the automatic exchange of information arrangements. This process is further illustrated in the diagram below: