Public and multinational business three-tier model

The 5 pillars of compliance

We monitor the level of willing participation in the tax system through the OECD’s 4 pillars of tax compliance.

The three-tier model (3TM) is comprehensive and leverages the pillars of compliance to consider all areas of tax performance and the tax and super laws. This means that the model covers the different ways taxpayers interact with the tax and super systems.

Increasingly we are also focussing on third-party reporting as a 'fifth pillar' in its own right. Third-party reporting is reporting on the tax affairs of others. The modern tax system is increasingly relying on third-party data provided by large corporate groups. This has flow-on impacts for taxpayers of all sizes and how they interact with their tax obligations.

Taxpayer behaviours identified in the model are generally linked to one of the pillars of compliance:

1. Registration: Are taxpayers correctly registered in the tax system?
2. Lodgment: Are taxpayers lodging their forms on time?
3. Correct reporting: Are taxpayers providing the right information in their forms?
4. Payment: Are taxpayers paying their obligations on time?
5. Third party reporting: Are taxpayers providing accurate and timely data for the ATO?

The 3 tiers and what they tell us

The model is made up of 3 tiers that drill down into the behaviours we observe for public and multinational business:

• Tier 1: These are the major drivers of tax performance and non-performance for these taxpayers. These behaviours are what drives improvement or deterioration in the tax gap.
• Tier 2: These are the visible events for Tier 1 behaviours. They can impact on us achieving improvements in tax performance or preventing deterioration in the system.
• Tier 3: These are the specific focus areas for each Tier 2 event. This is where we intervene to address the behaviours.

How we use the 3TM in our decision making

By giving us a holistic view of taxpayer behaviours, the model:

• helps us focus on strategies that will help manage key compliance risks for large corporate groups
• supports us to reach our goal of reducing the large corporate tax gap and understand whether public and multinational businesses are meeting their tax obligations.

The model allows us to provide transparency on where we are focussing our efforts to:

• foster strong tax performance
• prevent and address tax non-performance by public and multinational business.

How taxpayers can use the 3TM

Our justified trust assurance programs focus on assuring that the largest public and multinational businesses have paid the right amount of tax. These programs provide an important foundation for our levels of confidence about tax compliance across the various behaviours addressed by the 3TM.

Public and multinational businesses can use the model to consider their performance in the tax and super systems. Through improved understanding of our views on observed behaviours, taxpayers can:

• gain insight into our focus areas and be prepared
• address any potential areas of non-performance early.

Owing to wide ranging differences in business activities, models and structures, not all focus areas in the model will apply to every taxpayer. However, the model can help taxpayers understand where we are likely to direct our attention and at what intensity.

Whilst the 3TM covers the key drivers of tax performance there may be times where non-compliance is detected but is not covered by the model. We may choose to investigate the matter even though the matter is not currently reflected in the model.

The PMB three-tier model

For public and multinational businesses, we've identified 5 behaviours driving tax performance:

• International related party dealings
• Cross-border investment structures
• Domestic tax positions and structures
• Administrative compliance obligations
• Actions that support tax compliance

These behaviours are Tier 1 of the three-tier model. The following tables outline the events (Tier 2) and focus areas (Tier 3) for each behaviour.

You can also download a copy of our PMB three-tier model (PDF, 112KB).This link will download a file

International related party dealings (Tier 1)

These events and focus areas typically relate to the 'correct reporting' pillar of compliance. Under this Tier 1 behaviour, we consider arrangements and dealings between international related parties that could have an impact on tax positions under Australian income tax law.

Events and focus areas for international related party dealings

Events (Tier 2)	Focus areas (Tier 3)
Transfer pricing and arm’s length conditions	Offshore hubs and commodity pricing Inbound supply chain distribution arrangements Transfer pricing mischaracterisation Financing arrangements Insurance and reinsurance
Intangibles arrangements	Intangibles migration arrangements (including mischaracterisation of Australian activities connected with intangibles) Characterisation of royalty payments

Cross-border investment structures (Tier 1)

These events and focus areas typically relate to the 'correct reporting' pillar of compliance. Under this Tier 1 behaviour, we consider arrangements and business structures that cross more than one jurisdiction and the impacts under Australian income tax law.

Events and focus areas for cross-border investment structures

Events (Tier 2)	Focus areas (Tier 3)
Debt and capital structures	Pricing and quantum of debt Debt creation, loading and dumping Interest withholding tax Characterisation of debt and equity Third-party debt test Restructuring in response to thin capitalisation rules
Disposal of assets or businesses by foreign residents	Characterisation of disposals Non-resident tax exemptions Multiple entry consolidated (MEC) groups and capital gains tax (CGT) consequences
Structuring through vehicles or arrangements	Accessing managed investment trust (MIT) concessions Inversion or top-hatting arrangements or imposition of partnerships or other entities Accessing treaty benefits Recognising costs through recharges or risk shifting Synthetic equity arrangements
Income recognition from business operations	Attribution of profits through controlled foreign companies (CFCs) Application of CFC regime Attribution of permanent establishment profits
Hybrid arrangements	Importation of offshore hybrid mismatches Offshore hybrid mismatches
Global tax arbitrage	Top-up tax requirements

Domestic tax positions and structures (Tier 1)

These events and focus areas typically relate to the 'correct reporting' pillar of compliance. Under this Tier 1 behaviour, we consider how Australian income tax law is interpreted and applied by businesses.

Events and focus areas for domestic tax positions and structures

Events (Tier 2)	Focus areas (Tier 3)
Characterisation of business activities	Treatment of capital and revenue Business fragmentation
Treatment of distributions	Claiming or accessing franking credits Allocation of franking credits Application of scheme provisions to corporate distribution
Claiming other tax concessions or rates	Entitlement to research and development (R&D) tax offsets Entitlement to base rate entity tax rate Entitlement to section 128F withholding tax exemption Eligibility for MIT status Foreign government investment Cost or expense recharge or push down
Creation and use of carried forward losses	Application of the business continuity test Use of revenue losses Use of capital losses
Disposal of wholly domestic business structures	CGT rollovers Allocable cost amount (ACA) calculations Contingent consideration arrangements
Treatment and reporting for goods and services tax (GST) purposes	Treatment of significant or unusual transactions involving financial supplies (e.g. financial acquisition threshold) Treatment applied by financial services, investment and insurance industries (e.g. GST apportionment, reduced input tax credits, reverse charge) GST classification of food and health products Reporting of GST on low value imported goods and inbound intangibles supplies by offshore entities Treatment applied to real property transactions and accommodation Entitlement to GST refunds due to retrospective change in treatment
Treatment and reporting for Petroleum resource rent tax (PRRT) purposes	PRRT deductions PRRT assessable receipts Transferred exploration expenditure PRRT avoidance arrangements Closing down expenditure

Administrative compliance obligations (Tier 1)

Under this Tier 1 behaviour, we consider the various administrative obligations of public and multinational businesses for registration, lodgment, payment, and third-party reporting.

Events and focus areas for administrative compliance obligations

Events (Tier 2)	Focus areas (Tier 3)
Foreign and multinational reporting	Lodgment of ATO general purpose financial statements (GPFS) Lodgment of country-by-country (CBC) reports Public CBC reporting Lodgment of Global Anti-Base Erosion (GloBE) and domestic minimum tax returns
Registration obligations	Permanent establishment registrations Offshore entities making supplies of low value imported goods and inbound intangibles to Australian consumers
Reporting obligations	Financial institution data – Common reporting standards (CRS) and Annual investment income reports (AIIRs) Investment body data – AIIRs and Attributed MIT (AMIT) member annual statements Taxable payments annual reporting (TPAR) system obligations Large Australian Prudential Regulation Authority (APRA) fund member reporting obligations Lifestyle assets data Health insurance data
Lodgment obligations	Lodgment of tax returns Lodgment of activity statements Lodgment and correct completion of annual return schedules Lodgment and correct completion of supplementary annual GST return Non-resident withhold reporting obligations Significant global entity (SGE) self-assessment
Payment obligations	On-time payment of income tax (including instalments) On-time payment of GST Large fund payment standards
Employer and other indirect tax obligations	Fringe benefits tax (FBT) obligations Employer superannuation guarantee (SG) obligations Pay-as-you-go (PAYG) withholding obligations Luxury car tax (LCT) obligations Excise obligations Fuel tax credit (FTC) obligations

Actions that support tax compliance (Tier 1)

These events and focus areas typically relate to other actions taxpayers may take to support tax compliance.

Events and focus areas for actions that support tax compliance

Events (Tier 2)	Focus areas (Tier 3)
GST governance, systems and controls	Effective systems and controls ensure accurate GST reporting and issuance of invoices
Governance	Operational effectiveness of governance processes Governance over third-party data
Reliance on tax advice	Promoter penalties Marketing of high-risk GST arrangements
Engagement with regulator	Making true and accurate statements Providing full information Adhering to due dates for information requests Privilege and concession claims Satisfying Foreign Investment Review Board (FIRB) conditions