Contributed by Ed Carr, Tax Writer, Wolters Kluwer Tax Team.
The recent news that the European Commission has ordered Apple Inc to pay taxes of up to €13b (A$19.15b) saved under a special tax deal with Ireland highlights the global groundswell for making multinational enterprises (MNEs) pay more tax on profits.
Australia is an active participant in global action against base erosion and profit shifting (BEPS). In particular, it has adopted the Country-by-Country (CbC) reporting regime developed by the Organisation for Economic Cooperation and Development (OECD). Large MNEs must report for income years commencing on or after 1 January 2016. MNEs with a calendar year for tax could be reporting as early as the end of next year.
In this blogpost, we examine what reporting entities are required to do under CbC reporting and we note that there are quite a few unanswered questions concerning reporting obligations.
Australian resident entities that are part of an MNE group with annual global income of A$1b or more must lodge annual statements with the ATO that conform with the OECD’s CbC reporting regime.
The OECD regime is designed to provide tax authorities with a global picture of how MNEs operate, including information on the global allocation of profits, revenues, taxes paid and other economic activity. Participating countries will share reports from MNEs with other jurisdictions under to government-to-government mechanisms.
The ATO will use the information to make an informed transfer pricing risk assessment and to facilitate a transfer pricing audit, if necessary.
CbC reports are mandated by Subdiv 815-E of ITAA 1997. However, Subdiv 815-E contains only a bare framework for reporting. The detail of the reporting obligations is found in policies developed by the OECD and which have been incorporated into domestic legislation. The OECD guidance on CbC reporting contains substantial detail about implementation. However, technically it is a set of policies and recommendations that requires adaptation for local Australian requirements.
The primary source of guidance on CbC reporting is the OECD’s Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (referred to here as the “Transfer Pricing Guidelines”). Chapter V (Documentation) of the Transfer Pricing Guidelines contains standards for transfer pricing documentation and a template for CbC reporting. A number of other OECD documents are also relevant for implementing the reporting regime.
Three statements must be given:
- a CbC report with information relating to the global allocation of the MNE’s income and taxes paid, together with certain indicators of the location of economic activity within the MNE group
- a master file providing an overview of the MNE group business, including the nature of global business operations, the overall transfer pricing policies, and global allocation of income and economic activity, and
- a local file focusing on specific transactions between the local reporting entity and associated enterprises, the amounts involved in the transactions, and an analysis of transfer pricing decisions made.
The Transfer Pricing Guidelines recommend that the ultimate parent entity of an MNE group should file the CbC report in their jurisdiction of residence. The reporter must be in a position to oversee and have access to information about the global operations of the MNE. In practice, business units in the countries in which the MNE operates may be called on to contribute local country information for completion of the CbC report.
The Transfer Pricing Guidelines recommend that the master file (and the local file) should be filed directly with the tax administrations in each relevant jurisdiction, as required by those administrations. However, the information required in master file is extensive and covers the operations of the MNE group as a whole. As is the case for the CbC report, the preparer of the master file would need to have access to information about the MNE’s global operations. That role could, in practice, be filled by the ultimate parent entity of the MNE.
At present, it is not clear how much detail an Australian subsidiary of an MNE would need to provide in a master report to the ATO.
The local file provides more detailed information relating to specific intercompany transactions and focuses on the transfer pricing approach to transactions between a local entity and associated enterprises in different countries.
The ATO has already issued guidance on some administrative approaches to reporting (see Law Companion Guideline LCG 2015/3 and the Local file — high level design) and it has flagged that more guidance is under development. Some significant questions concerning reporting obligations are discussed below.
Who will lodge what and where?
The “default” position under Subdiv 815-E is that the Australian reporting entity must lodge all three kinds of reports (the master file, the local file and the CbC report), unless exempted. However, if the Australian reporting entity is part of an MNE in which another entity (for example, the ultimate parent entity of the group) files the CbC report in another jurisdiction, the ATO may be able to obtain the report from another tax administration, under an information-sharing arrangement. If that is so, the ATO says it may be prepared to exempt the Australian entity from the reporting obligation (see LCG 2015/3).
Identifying who is required to lodge reports is made more complicated by the fact that multinational groups operate in many jurisdictions and one or more of those jurisdictions may not have implemented the OECD’s CbC reporting regime, or if they have, they may not have an appropriate information-sharing arrangement with Australia. Further, even if the foreign jurisdiction has the full legislative framework in place, there may be what the OECD calls a “systemic failure” because the jurisdiction has suspended automatic exchange of information or has otherwise failed to meet obligations under a relevant agreement.
So, deciding the obligations of Australian resident reporting entities could be quite complex and a factor in the ATO’s approach will be the availability of relevant reports from foreign tax administrations. Given the complexities, it may be wise for Australian reporting entities to obtain at least an advance extension of time for lodgement of reports, if not a permanent exemption, if that can be reasonably justified.
Australian resident reporting entities should also consider whether they could obtain relevant reports (for example, the master file) prepared by an overseas affiliate, for lodgment locally.
The need for some administrative flexibility is recognised in LCG 2015/3 which states that if an entity is unable to provide the CbC report and/or the master file because its parent entity is not yet required to do so in its local jurisdiction, an exemption will “most likely be granted for the first year of CbC reporting (with respect to the CbC report and master file)”.
This may be relevant, for example, for Australian entities of MNE groups with their ultimate parent entity resident in the USA. The USA has implemented compulsory CbC reporting for US MNE groups with effect for tax reporting periods starting on or after 30 June 2016. That means some US MNEs will not be required to lodge a CbC report for the 2016 calendar year. Without some form of relief from the ATO, an Australian subsidiary of the US MNE would be required to lodge a CbC report and the master file in Australia.
It is noted that US MNEs will be able to voluntarily lodge CbC reports for tax years starting in the period from 1 January 2016 to 30 June 2016.
Local file being developed
The ATO has released guidance on its website for entities lodging a local file under the CbC rules (theLocal file — high level design). The guidance sets out the information required to be given in the standard version (or the “long form”) of the local file. The ATO’s long form local file information closely follows OECD guidance on the local file content. However, reporting entities that meet specified materiality standards (reflecting the level of business operations, complexity or perceived level of risk) may lodge a simpler “short form local file”.
Less information is required in the long form local file for agreements and transactions listed in an “exclusions list” than is needed for other transactions. Further, there are measures to avoid duplicating information required in the long form local file and the International Dealings Schedule (IDS) and in other ways.
Elements of the ATO’s approach are still under development and will be released in the future, including: an XML schema for lodging a part of the long form local file and further guidance on what appears to be the ability of a reporting entity to aggregate information about transactions under agreements covered by a “relevant agreement series”.
Exemptions from reporting
The rules allow the Commissioner to exempt a reporting entity from reporting altogether, or from giving a particular kind of statement. A specified class of entity may be exempted (eg the ATO intends to exempt entities listed in Div 50 of the ITAA 1997: see LCG 2015/3).
The Commissioner will need flexibility in circumstances where, for example, it is not necessary or not reasonable for an Australian reporting entity to lodge one or more of the reports.
The Commissioner has foreshadowed that further positions on exemptions are under consideration. Reporting entities are entering a period of uncertainty in which negotiating reporting arrangements with the ATO will include, as a factor, the availability or otherwise of information from foreign affiliates.
Overlap of reporting rules
CbC reporting joins a growing list of record-keeping obligations, many of which are focused on transfer pricing and international transactions. The list includes but is not limited to:
- the general tax record-keeping rules in ITAA 1936 s 262A
- the requirements for documenting transfer pricing matters in TAA 1953 Sch 1 Subdiv 284-E
- the obligation of a corporate tax entity to lodge a general purpose financial statement (TAA 1953 s 3CA)
- the obligation of taxpayers with certain international dealings to lodge an IDS, and the record-keeping and reporting requirements of taxpayers with Advance Pricing Arrangements (APA) or Annual Compliance Arrangements (ACA).
Potentially, there are overlaps between some of these obligations, although many of them focus on specific and unique information.
The ATO has said that it will develop administrative solutions to address the problem of duplication of information required by multiple record keeping systems (see LCG 2015/3). For example, the ATO website guidance on the local file (the Local file — high level design) lists sections of the IDS that do not need to be completed if an entity lodges part of their local file with the tax return.
For detailed commentary on the CbC reporting regime, which incorporates the extensive guidance from the OECD, see the Australian Federal Income Tax Reporter from paragraph 620-550.
CCH iKnow has useful commentary on transfer pricing.