Is your business a member of an international group with annual consolidated worldwide revenue of AUD$1 billion (EUR€670 million or USD$700 million) or more?
If you answered ‘Yes’ to this question, your business is a Significant Global Entity (SGE), and the new SGE income tax regime applies to you.
If you answered ‘No’, but your business is close to reaching these revenue thresholds, then keep reading because the SGE regime may apply to you soon.
Australia’s new SGE tax rules and implications
In response to the OECD initiative to combat the base erosion and profit shifting (BEPS) undertaken by some large global corporate groups, the Australian Government has announced and implemented a number of new income tax measures applicable to large global businesses with operations in Australia.
The Government’s aim is, among other things, to understand the worldwide businesses of Australian taxpayers, detect transfer pricing risks and maximise the collection of income tax on incorrectly valued cross-border transactions.
Each of the new measures drives off the concept of SGE.
The following new taxation regimes apply to SGEs:
- Country-by-Country reporting (“CbC reporting”)
- Financial reporting to the ATO
- Multinational Anti Avoidance Law (“MAAL”)
- Diverted Profits Tax (“DPT”)
- Transfer Pricing
- New penalty regime for non-compliance
Each of these new taxation regimes is summarised below.
SGEs are required to provide Country-by-Country reporting (CbC reporting) reports to the Australian Taxation Office (ATO) for their worldwide business arrangements.
If you are an SGE, CbC reporting commences on:
- 31 December 2016 – for taxpayers lodging income tax returns on a 31 December year-end basis;
- 30 June 2017 – for taxpayers who lodge income tax returns on a 30 June year-end basis.
CbC reports are due for lodgement with the ATO 12 months after your tax year end, for example, 31 December 2017 for the tax year ended 31 December 2016.
Exemptions from CbC reporting may be available in limited circumstances. Applications for exemption must be lodged as soon as possible with the ATO for its assessment and to make a timely decision.
Notably, 44 governments around the world, including most EU countries, are expected to implement CbC reporting. A further number of major international governments are not expecting to implement CbC any time soon, including the United States.
Financial Reporting to the ATO
In addition to CbC reporting, and commencing on 1 July 2016, all SGEs are required to make general purpose financial statements available to the ATO by the time of submitting their annual tax return.
The first general purpose financial reports are to be lodged by:
- 15 January 2018 – for taxpayers who lodge income tax returns on a 30 June year-end basis;
- 15 July 2018 – for taxpayers lodging income tax returns on a 31 December year-end basis.
Multinational Anti Avoidance Law
As of 1 January 2016, all SGEs are subject to the new Multinational Anti Avoidance Law (MAAL). The MAAL is designed to be a specific tax anti-avoidance and ‘profit shifting’ law for multinational businesses.
If the ATO imposes the MAAL on a taxpayer, all profits that the ATO attributes from overseas back to Australian taxpayers will be subject to Australian tax and very significant penalties may apply.
Diverted Profits Tax
The DPT is currently sitting as a Bill before Parliament. The DPT rules are proposed to come into effect from 1 July 2017 and can apply to transactions or arrangements which commenced prior to 1 July 2017.
Importantly, excluded from the DPT are Australian taxpayers who are SGEs but have total Australian sourced revenue (on a group basis) of $25 million or less.
The DPT law applies a 40% income tax rate to profits which have been diverted from Australia to a country with a lower corporate tax rate than Australia’s. Based on the current 30% Australian corporate tax rate, DPT can potentially be triggered where the foreign corporate tax rate is less than 24%. Given that most other countries around the world have reduced their corporate tax rate or are in the process of reducing their corporate tax rates to lower than 24%, the DPT has a potentially very broad application to Australian businesses.
Taxpayers hit with a DPT assessment will be obligated to pay the DPT tax upfront to the ATO. Taxpayers then have 12 months to argue their position for claiming back the DPT from the ATO. Avenues for appealing DPT assessments are deliberately more restrictive than ordinary income tax appeals processes.
We expect that the amount of ‘diverted profits’ will be identified by the ATO from Transfer Pricing reviews of taxpayers and that taxpayers who have the following international arrangements with lower taxed countries may be more likely to be scrutinised from a DPT perspective:
- Payments overseas for the use of intellectual property;
- Payments overseas for the use of marketing and / or administration services;
- Payments overseas for interest on non-commercial loans;
- Taxpayers who have created foreign branches or subsidiaries to receive revenue.
Australia’s transfer pricing regime was significantly overhauled in 2013 and is being amended again as part of the introduction of the DPT regime.
The transfer pricing rules place a significant documentary burden on taxpayers who have transactions with foreign related parties.
Importantly, the ATO has recently released guidance on circumstances when lower levels of transfer pricing documentation may be kept. Where applicable, the simplified record keeping rules may have significant administrative savings and may provide a good indication of where the ATO will focus their attention in transfer pricing reviews.
Penalties for non-compliance
An Australian taxpayer that fails to submit a statement or report on time will be liable for penalties under the Tax Administration Act 1953 (Australia). Proposed ‘non-lodgement’ penalties for SGEs may range anywhere up to $450,000.
Tax Risk and Corporate Governance
The ATO expects that tax risk management should be an element of good corporate governance. As such, the ATO has recently released the Tax Risk Management and Governance Review Guide (the Guide) to assist Directors, Boards and management to meet the tax risk management and corporate governance expectations of the ATO.
The Guide recommends a number ways to implement tax risk management in different types of organisations and briefly discusses the different ATO audit approaches for organisations with good tax governance in place versus organisations with poor tax governance.
The ATO infers in the Guide that it has higher expectations of SGEs to have good tax risk and corporate governance systems in place.
William Buck Recommendation
The ATO expects management and directors to have a good understanding of their Australian and foreign business taxation positions, and be able to communicate tax positions with the ATO clearly and quickly.
Therefore, we recommend that anyone who deals with related parties overseas for business or investment purposes considers and documents their approach to the taxation of those transactions.
The level of documentation to be kept will be a function of:
- The nature, size and complexity of the transactions you have with foreign related parties;
- The nature of your relationship with your foreign related parties and head office;
- The Australian coverage of existing documentation maintained by you and others in your global business group, and the ease with which that documentation can be used to prepare Australian specific documentation; and
- Whether or not the increased reporting for SGEs applies.
If you have any questions about your status as an SGE and the resulting implications, please contact your local tax advisor.