Explanatory Memorandum(Circulated by the authority of the Treasurer, the Hon J. B. Hockey MP)
Chapter 5 Country-by-Country reporting
Outline of chapter
5.1 Schedule 4 to this Bill implements Action 13 of the G20 and Organisation for Economic Co-operation and Development's (OECD's) Action Plan on Base Erosion and Profit Shifting (the BEPS Action Plan). Action 13 developed new standards for transfer pricing documentation and Country-by-Country (CbC) reporting. These amendments require significant global entities to provide three statements to the Commissioner of Taxation (Commissioner) with relevant and reliable information to assist the Commissioner carry out transfer pricing risk assessments.
5.2 Unless otherwise noted, all legislative references in this chapter are to the Income Tax Assessment Act 1997 (ITAA 1997).
Context of amendments
5.3 Australia's transfer pricing rules seek to ensure an appropriate return for the contribution made by the Australian operations of a multinational is taxable in Australia for the benefit of the community. These rules provide a legislative framework, based on the arm's length principle, which ensures that an entity's tax position is consistent with that of an independent entity dealing wholly independently with others. They align Australian domestic law with the international transfer pricing standards set out in the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations approved by the Council of the OECD and last amended on 22 July 2010 (the Transfer Pricing Guidelines).
5.4 In addition, section 284-255 of Schedule 1 to the Taxation Administration Act 1953 (TAA 1953) sets out the records that an entity may prepare and maintain in order to demonstrate that it has correctly applied the transfer pricing rules. These records should:
- be prepared before an entity lodges its tax return;
- be in English, or readily convertible to English; and
- explain how Subdivisions 815-B or 815-C apply to the transfer pricing matter.
5.5 If an entity does not meet these documentation standards and the Commissioner makes a transfer pricing adjustment, the administrative penalties in Division 284 of Schedule 1 to the TAA 1953 would apply as though a transfer pricing treatment was not reasonably arguable. The entity may then be liable for a higher base penalty amount than if it had a reasonably arguable position.
5.6 The BEPS Action Plan, adopted by OECD and G20 countries in 2013, is a fifteen-point plan designed to ensure that profits are taxed where activities that generate profits are performed. Action 13 of the BEPS Action Plan recognises that enhancing transparency for tax administrations, by providing them with adequate information to conduct transfer pricing risk assessments, is an essential part of tackling profit shifting.
5.7 The OECD's 2014 report on Action 13, Guidance on Transfer Pricing Documentation and Country-by-Country Reporting (Action 13 report) contains a new Chapter V of the Transfer Pricing Guidelines that sets out revised standards for transfer pricing documentation. It recommends that jurisdictions require multinationals to provide information through three reports: a 'CbC report', a 'master file' and a 'local file'.
5.8 The CbC report, master file and local file together will provide a clear overview of key financial and operational metrics relevant to a global group, as well as their Australian operations. This information will provide the Australian Taxation Office (ATO) and other tax authorities with useful information to assess transfer pricing risks and, when necessary, to commence and target audit enquiries.
5.9 As outlined in the OECD's February 2015 report, Guidance on the Implementation of Transfer Pricing Documentation and Country-by-Country Reporting, it is envisaged that, in most cases, CbC reports will be filed in the jurisdiction of the multinational group's global parent entity and automatically exchanged with tax authorities in other jurisdictions in which the group operates. The OECD has developed three model competent authority agreements that could be used to facilitate the exchange of CbC reports. Australia envisages making CbC reports filed in Australia available for exchange under such arrangements, and receiving CbC reports from other jurisdictions.
Summary of new law
5.10 Schedule 4 inserts new Subdivision 815-E into Division 815 requiring significant global entities that are Australian residents or foreign residents with an Australian permanent establishment (PE) provide a CbC report, a master file and a local file to the Commissioner.
5.11 Failure to provide this information will not in itself prevent an entity from having a reasonably arguable position if documentation is still maintained in accordance with existing requirements.
5.12 The amendments made by this Schedule apply in relation to income years starting on or after 1 January 2016.
Comparison of key features of new law and current law
|New law||Current law|
|Entities with annual global revenue of $1 billion or more must provide the following three statements to the Commissioner:
Entities with annual global revenue under $1 billion do not need to provide these statements.
All entities must continue to maintain specific transfer pricing document to maintain a reasonably arguable transfer pricing position.
|In order to have a reasonably arguable position in relation to a transfer pricing position, an entity must maintain specific transfer pricing documentation.|
Detailed explanation of new law
What entities need to report?
5.13 Australian entities that were significant global entities in the previous income year are required to provide one or more statements to the Commissioner. These statements need to be in the approved form and provided within 12 months of the end of the income year to which the statement relates. This includes Australian resident entities and foreign entities with a PE in Australia. [Schedule 1, item 3, section 960-555 and Schedule 4, item 1, subsections 815-355(1) and (2) of the ITAA 1997]
5.14 Entities that are consolidated for Australian income tax purposes need only report as a single entity as the reporting obligation will rest with the head company of the consolidated (or multiple entry consolidated) group. This is because the single entity rule in section 701-1 will treat a subsidiary member of a consolidated group as a part of the head company for these purposes. The obligation to report is within the core purposes listed in section 701-1 as the information contained in the report is relevant and incidental to working out the head company's income tax liability.
Replacement reporting periods
5.15 The Commissioner may, by notice in writing, allow an entity to submit one or more statements in relation to a 12 month period other than an income year. This allows the Commissioner to provide entities with some flexibility in situations where an Australian subsidiary has a different income year from its parent company and may be required to submit both a local file (relating to its income year) and a CbC report (relating to its parent's income year). [Schedule 4, item 1, subsection 815-360(1) of the ITAA 1997]
5.16 Such notification is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003 because it is not legislative in character. [Schedule 4, item 1, subsection 815-360(2) of the ITAA 1997]
5.17 The Commissioner may exclude specific entities from having to provide a statement through a written notification. Such notification is not a legislative instrument within the meaning of section 5 of the Legislative Instruments Act 2003 because it is not legislative in character. [Schedule 4, item 1, subsections 815-365(1) and (2) of the ITAA 1997]
5.18 The Commissioner may also provide an exemption for a specified class of entity by legislative instrument. [Schedule 4, item 1, subsection 815-365(3) of the ITAA 1997]
5.19 The Commissioner may choose to take the following factors into account when making a decision to provide an exemption to an entity or class of entities:
- the risk profile of the local entity, including for example the amount of its overseas dealings;
- the compliance burden imposed on the entity; and
- whether the Commissioner will receive the relevant statement or statements by alternative means.
5.20 For example, a local entity may only be required to provide the master file and local file to the Commissioner, in circumstances where its global parent entity has made a CbC report available to a tax authority in a jurisdiction with which Australia has an information-sharing arrangement in place, and the ATO will receive the CbC from the other tax authority. Similarly, a local entity may not need to provide the master file if another member of its multinational group that is an Australian resident has provided the master file to the Commissioner.
5.21 It is expected that the Commissioner will provide more comprehensive guidance around how this exemption power will be applied.
5.22 In addition, classes of entities may be excluded from these reporting obligations by regulation. Of note, section 909-1 provides that the Governor-General may prescribe matters that the ITAA 1997 permits to be prescribed. [Schedule 4, item 1, paragraph 815-355(1)(d) of the ITAA 1997]
What information needs to be reported?
A three-tiered approach to transfer pricing documentation
5.23 An entity subject to these reporting obligations will need to provide each of the following statements to the Commissioner:
- a master file providing an overview of the multinational enterprise group business, including the nature of its global business operations, its overall transfer pricing policies, and its global allocation of income and economic activity;
- a local file focusing on specific transactions between the reporting entity and its associated enterprises in other countries, as well as the amounts involved in those transactions, and the entity's analysis of the transfer pricing determinations that it has made; and
- a CbC report containing certain information relating to the global allocation of the multinational enterprise's income and taxes paid together with certain indicators of the location of economic activity within the multinational enterprise group.
[Schedule 4, item 1, subsection 815-355(3) of the ITAA 1997]
5.24 The content of these three statements are further described in Annexes I to III of Chapter V of the Transfer Pricing Guidelines as set out in the Action 13 report.
5.25 There is a degree of overlap between the documentation standards in Subdivision 284-E of Schedule 1 to the TAA 1953 and the local file as described in Annex II to Chapter V of the Transfer Pricing Guidelines as set out in the Action 13 report. Both require entities to analyse and document similar matters in relation to their transfer pricing positions, including, for example:
- the circumstances, including the functions performed, assets used and risks borne by the relevant entities;
- the most appropriate transfer pricing method and the reasons for choosing that method; and
- the existence of any comparable circumstances, the degree of comparability and whether any adjustments are necessary to eliminate the effect of material differences between those circumstances.
5.26 Accordingly, entities may draw much of the content for the local file from documentation that meets the requirements in Subdivision 284-E of Schedule 1 to the TAA 1953. For example, an entity that has conducted and documented a comparability analysis for a transfer pricing treatment in accordance with Subdivision 284-E of Schedule 1 to the TAA 1953, may use that analysis without modification for the purposes of the local file.
Providing each statement in the approved form
5.27 Entities must provide each statement to the Commissioner in the 'approved form'. The concept of approved forms is used in the tax laws to provide administrative flexibility to specify the precise form of information required and the manner of providing it. This allows the Commissioner to take into account entities' existing reporting obligations when determining the information to be provided in the approved form. It also allows for any agreed future updates to the standards in Annexes I to III of Chapter V of the Transfer Pricing Guidelines as set out in the Action 13 report to be implemented administratively. [Schedule 4, item 1, subsection 815-355(1) of the ITAA 1997]
5.28 The information required to be provided in the approved form will take account of the guidance provided in Chapter V of the Transfer Pricing Guidelines as set out in the Action 13 report, which recognises that there is a balance to be struck between gathering useful information and imposing a disproportionate compliance burden on taxpayers.
5.29 For example, it is envisaged that the approved forms will include materiality thresholds in relation to reportable transactions as contemplated in paragraph 32 of Chapter V of the Transfer Pricing Guidelines as set out in the Action 13 report. That guidance provides that individual countries should establish materiality standards that are objective, commonly understood and accepted in commercial practice. Factors the Commissioner may take into account when determining materiality could include:
- the size and nature of the transaction;
- whether the transaction is the subject of an existing administrative safe harbour; and
- whether the transactions are the subject of other administrative arrangements such as Advance Pricing Arrangements and Advance Compliance Arrangements.
5.30 Each statement is due to the Commissioner within 12 months of the end of the income year (or replacement reporting period) to which the statement relates. [Schedule 4, item 1, subsections 815-355(2) and 815-360(1) of the ITAA 1997]
5.31 However, section 388-55 of Schedule 1 to the TAA 1953 allows the Commissioner to defer the time that entities must lodge a statement in the approved form. This means that entities may lodge these statements by a later date where that has been approved by the Commissioner.
5.32 Alternatively, taxpayers may prefer to provide relevant statements at the same time as lodging their income tax return and the ATO is expected to facilitate this.
Penalties for non-compliance
5.33 Australia's tax laws contain a range of penalties for entities that do not comply with their reporting obligations. For example;
- Division 284 of Schedule 1 to the TAA 1953 sets out the penalties that apply to entities that make false or misleading statements about tax-related matters; and
- Division 286 of Schedule 1 to the TAA 1953 sets out the penalties that apply to entities that fail to lodge statements on tax-related matters on time.
5.34 This means, for example:
- an entity that makes a false or misleading statement because of an intentional disregard of the tax laws may be liable to an administrative base penalty amount of 60 penalty units - per table item 3A of subsection 284-90(1) of Schedule 1 to the TAA 1953;
- an entity that makes a false or misleading statement through recklessness as to the operation of the tax laws may be liable to an administrative base penalty amount of 40 penalty units - per table item 3B of subsection 284-90(1) of Schedule 1 to the TAA 1953; or
- an entity that makes a false or misleading statement because of a failure to take reasonable care to comply with the tax laws may be liable to an administrative base penalty amount of 20 penalty units - per table item 3C of subsection 284-90(1) of Schedule 1 to the TAA 1953.
5.35 Similarly, an entity that fails to provide a statement on time, or in the approved form, may be liable under subsection 286-75(1) of Schedule 1 to the TAA 1953 to an administrative base penalty amount of five penalty units for each period of up to 28 days from when the document was due to a maximum of five periods (see section 286-80 of Schedule 1 to the TAA 1953).
5.36 The Commissioner has the discretion to remit an administrative penalty in whole or in part under section 298-20 of Schedule 1 to the TAA 1953.
5.37 An entity will not be eligible to have a reasonably arguable position in relation to a transfer pricing matter by reason of providing the three statements described at paragraph 5.23 to the Commissioner. However, regardless of whether an entity fails to provide a statement on time, or in the approved form, it would still be eligible to have a reasonably arguable position in relation to a transfer pricing matter if it meets the documentation requirements in section 284-255 of Schedule 1 to the TAA 1953.
5.38 These amendments insert guidance material for Subdivision 815-E. [Schedule 4, item 1, section 815-350 of the ITAA 1997]
Application and transitional provisions
5.39 These amendments apply in relation to income years commencing on or after 1 January 2016. [Schedule 4, item 2]
Statement of Compatibility with Human Rights
Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011
5.40 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.
5.41 This Schedule amends the ITAA 1997 to require significant global entities to file one or more statements with the Commissioner. These statements will provide the Commissioner with relevant and reliable information to carry out transfer pricing risk assessments.
Human rights implications
5.42 This Schedule does not engage any of the applicable rights or freedoms, as it applies to multinational entities not individuals.
5.43 This Schedule is compatible with human rights as it does not raise any human rights issues.