In continuation with the measures that the Government has taken to protect Australia’s tax base and ensure all businesses pay their fair share of tax, it introduced the new OECD standards on transfer pricing documentation and Country-by-Country reporting in the 2015 Budget.
The biggest hurdle that was faced was that the corporations don’t always answer questions about the amount of taxes they are paying (or not paying) and where. These deals, so often secured behind closed doors, were brought out into the open for once, allowing governments, journalists, and the general public to see, in stark reality, the methods that multi-national corporations (MNCs) were using to send profits to low-tax country, far from where the actual economic activity was taking place.
In simple words, there was lack of clear and transparent information about the operations of MNCs. Currently, multinationals are able to exploit loopholes in domestic and international tax laws to shift profits from one country to the next, often through tax havens (or “secrecy jurisdictions”), with the end goal of reducing or even eliminating the tax they pay to governments.
Although these MNCs report on their profits, revenue, taxes paid, and number of employees, the global numbers they provide are for the operations of all of their subsidiaries bundled together. This dashes any hope of understanding a corporation’s operations in a specific country.
Country by country reporting (CBCR) would require MNCs to share this information for each country where they operate. The information would give governments a much greater ability to spot irregular activity that should be investigated further, including for example, cases of corruption and bribery. MNCs should be required to publish CBCR information because this global problem has proven too big for national governments to unravel alone.
Multinational corporations should be required to submit individual reports with basic financial information such as revenue, profits, taxes, and number of employees for each jurisdiction in which they operate. These country by country reports should be made available to the public. Public country-by-country reporting strengthens the financial system for everyone.
It would provide information to a wide range of stakeholders, which will strengthen efforts to monitor corrupt practices, corporate governance and responsibility, tax payments, and world trade flows.
It would help investors determine whether corporations they invest in operate in politically unstable regimes, tax havens, war zones, and other sensitive areas, or if there appears to be additional risk arising from aggressive tax planning that might prompt investors to question an MNC’s management team about the issue.
It would allow public interest groups and investigative journalists to make sure that MNCs are paying their share of tax in the countries where they do business, especially where tax authorities are strapped for resources and don’t have the ability to devote the time necessary to this sort of investigation. If the operations of MNCs were truly transparent, a more equitable financial system would be closer to reality.
This requires entities with annual global revenue of $1 billion or more to file an annual statement with the Commissioner of Taxation. Large multinationals operating in Australia will be required to provide this statement, which will provide the Commissioner with relevant and reliable information to carry out transfer pricing risk assessments.
An entity may be required to include in its statement one or more of:
- a Country-by-Country report containing information on the location of the economic activity undertaken by the multinational group;
- a master file, which provides a high-level description of the multinational group’s business operations; and
- a local file, which describes the Australian entity’s operations and cross border related party transactions.
These amendments double the maximum administrative penalties for large companies that are found to have entered tax avoidance or profit shifting schemes.
These increased penalties only apply to companies with annual global revenue exceeding $1 billion and that do not adopt a tax position that is reasonably arguable.
SIGNIFICANCE OF COUNTRY BY COUNTRY REPORTING
There’s strong interest in country by country reporting from the perspective of investors who value economic stability. Having publicly available country by country financial reports would arm potential investors with information they can use to make sure a company isn’t distorting its bottom line or taking excessive risks.
And it’s no secret that countries and communities around the world need this additional revenue stream. Recovering from the impacts of the global financial crisis, governments have struggled to find the financial resources to pay for basic social services in many countries. This kind of tax dodging is a global problem that is enhanced by tax haven structures that facilitate and profit from financial secrecy. The byproduct is a financial system that is devoid of accountability, often depriving governments of much-needed revenue.
Download the PDF here: beps-action-13-country-by-country-reporting-implementation-package