Multinational corporations must deal with new laws and closed loopholes to ensure profits are taxed in countries where they are earned.
By Les Nethercott
In recent years global tax avoidance has become a growing concern for many countries, a major catalyst for which has been the Organisation for Economic Co-operation and Development’s (OECD) BEPS (Base Erosion Profit Shifting) initiative.
The OECD defines BEPS as: “Tax planning strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations where there is little or no economic activity, resulting in little or no overall corporate tax being paid.”
In response, it formulated a number of Action Plans for global tax authorities to implement.
One such plan, Action 13, “Transfer Pricing Documentation and Country-by-Country Reporting”, focuses on country-by-country (CbC) reporting and recommends specific disclosures concerning the tax affairs of multinational enterprises. Its essence is that multinational taxpayers should produce a report detailing their global operations and tax activities. In particular, it states that the report should cover a number of matters to be incorporated in a master file, local document file and CbC report.
The first requirement is that multinational enterprises (MNEs) prepare a master file which provides relevant tax authorities with information regarding their global business operations and transfer pricing policies.
The second requirement is a local file, which should contain specific details for each country concerning material related-party transactions, the amounts involved and an entity’s analysis of such transactions.
The third part of the disclosure requirements is that MNEs file a CbC report for each jurisdiction in which they undertake business concerning the global allocation of multinational income, revenue, profit before tax, tax paid and accrued. The CbC report should also contain information identifying each entity within the group undertaking tax in a particular jurisdiction and the type of activities conducted.
Australia – where getting multinational companies to pay their “fair share” of tax has been an ongoing political theme – has now enshrined many of the recommendations in legislation.
The 2016-17 Federal Budget announced a diverted profits tax (DPT). In the previous year's budget, the former Treasurer adopted the first limb of a diverted profits tax that had already been adopted in the UK ‒ the so-called Multinational Anti-Avoidance Law (MAAL). This year, the second limb has been implemented (see breakout).
Overall, the aim is to tax large multinationals (those with annual global turnover exceeding AUD 1 billion) that have a taxable presence in Australia (either a branch or subsidiary) where the tax paid is seen to have been reduced by a transaction with a foreign but related party.
In attempting to address multinational tax avoidance, there are now clear requirements for “significant global entities” (SGEs) to undertake certain disclosures to the Australian Taxation Office (ATO). The legislation also requires the CbC report to be filed in the jurisdiction of the multinational group’s parent entity, so it can be automatically exchanged with other tax authorities where the group operates.
In cases where a MNE fails to comply with CbC reporting requirements, penalties as high as AUD 540,000 per offence may apply.
Given the Australian legislation substantially adopts recommendations contained in Action Plan 13, it incorporates taxpayer compliance, corporate governance and risk management issues MNEs and foreign tax authorities should carefully consider.
CbC reporting places the onus of compliance on the taxpayer and, essentially, the parent entity of a MNE. Accordingly, where a MNE has subsidiaries operating in multiple countries there will be a need for a system of reporting to be formally adopted in the parent entity and made operational throughout the group.
The OECD recommended CbC reporting operate from 1 January 2016, and Australia’s legislation aligns with this. Consequently, it is important that MNEs formalise and collect all relevant CbC data required under Action Plan 13.
Moreover, some of the information required needs to have been documented at the time of the transaction.
This may pertain to the nature of business activities and documentation of policies related to transfer pricing and corresponding transactions. In cases involving a number of entities undertaking business activities across multiple countries, it could be quite complex.
Although CbC reporting might seem confined to tax compliance, in some ways it has a much broader interface. This is because as compliance issues apply both locally and globally, they need to be formalised and implemented at board level.
As such, the boards of MNEs and subsidiary entities should implement a consistent and cohesive policy to collect and document all the information required. This could potentially involve disclosure of sensitive information and boards may feel compelled to take a proactive role in the implementation and compliance process, in which case the following will have to be addressed.
- A formal tax control framework reporting process, raising the issue of whether corporate boards are actively engaged in the tax reporting function and sufficiently aware of local and international developments like CbC tax reporting.
- The interface and role of the chief tax officer and board is clearly defined and established.
- The board has an established formal reporting process for tax matters, especially where material issues are involved.
- The board has an appropriate review process in place to ensure and check the timeliness and accuracy of compliance issues and any new developments.
CbC reporting disclosures are largely based on a self-assessment process whereby a MNE needs to determine whether subsidiary operations are caught by relevant requirements.
In the first instance, this may be at management level where senior tax personnel are aware of their roles in formulating the documents needed. It also requires proper systems and controls to ensure the readiness and accuracy of CbC information provided to the board.
In addition, there needs to be controls that formalise the storage of CbC data. Processes should also be implemented to ensure that when material quantitative and non- quantitative tax issues arise, they are reported and formalised at board level.
Boards have little choice other than to consider CbC reporting in a risk management context. As noted above, Australia has formalised CbC reporting and non-compliance can result in substantial penalties.
However, even though tax authorities around the world are increasingly proactive in adopting the OECD’s Action Plans, it is arguably just as important for MNEs to be seen as good corporate citizens by voluntarily supporting the measures.
Conversely, non-compliance may give rise to an even more aggressive stance by tax authorities and signal a more detailed analysis, examination and audit of MNEs’ global business operations.
When considered in combination with the OECD’s long-standing Convention on Mutual Administrative Assistance in Tax Matters, it would seem unwise that any MNE ignore this paradigm shift in global tax compliance.
Les Nethercott is Adjunct Associate Professor, Department of Accounting at Latrobe University.
Australia’s multinational tax avoidance laws
Diverted profits tax: To prevent multinational corporations using legal and accounting loopholes to move undeclared profits overseas in order to pay less tax, the government has introduced a new penalty tax. From 1 July 2017, large multinational organisations that move profits overseas to avoid Australian tax are penalised with a tax of 40 per cent.
ATO and Tax Avoidance Taskforce: The government has invested $679 million over four years to run a Tax Avoidance Taskforce, led by the Commissioner of Taxation. So far, the ATO has issued tax bills of $2.9 billion to large corporations, and the taskforce expects to raise a total of $3.7 billion in tax liabilities.
Multinational Anti-Avoidance Law: The law prevents large multinational corporations from claiming profits were earned overseas, when they were earned in Australia, and has been in effect since 1 January 2016. It impacts corporations with annual global income in excess of $1 billion.
Country-by-Country reporting: The new laws require large multinational corporations report details of their global financial activity to the ATO, including how much money they made and their tax bill in every country they do business.
Above figures are in Australian dollars.