Global Tax Reform and Australia: Understanding the Landscape and Preparing for 2023
Myriad global businesses representing a wide range of industries conduct business from and in Australia. Yet, according to a 2018 study, the nation loses roughly $16 billion in revenues each year due to factors ranging from multinationals to tax havens — money that could be used for the nation’s educational system, infrastructure, innovation and more.
The culprit: base erosion and profit sharing (BEPS). These largely legal tax strategies have encouraged multinationals to shift profits from nations with a higher corporate tax rate (25%-30% in the case of Australia) to low and no-tax locations, such as Malta, Lichtenstein and the Cayman Islands. The practice has only expanded with the rise of multinational giants in the digital sphere, such as Apple, Google and Facebook.
A new agreement by the G20 nations and framework by Organisation for Economic Cooperation and Development (OECD) promises to level the playing field. Yet the pending rules will bring complex new disclosure requirements as well as sweeping implications for entity and subsidiary management and corporate strategy — all under a tight deadline. An overview follows of the landscape and implications for boards, executive leaders and governance professionals.
Global Reforms with Australian Influence and Benefits
Announced in July 2021, the G20 agreement and its resulting reforms “will change the way income and taxing rights work across the global economy,” according to the Canberra Times. The reforms, the product of several years of discussion and negotiation, focus on two pillars:
- A levy on profit margins of over 10% for the world’s largest companies (firms with global annual revenues above $20 billion) in countries that remove all existing unilateral taxes on tech companies
- A global minimum corporate tax rate of 15%, which has the potential to raise up to $275 billion in additional revenues worldwide
These pillars will be brought to life through the OECD’s Framework on BEPS: “15 Actions that equip governments with the domestic and international instruments needed to tackle tax avoidance,” the OECD explained on its website. “Countries now have the tools to ensure that profits are taxed where economic activities generating the profits are performed and where value is created.”
Although the agreement was announced in Venice and the details involve the collaboration of 140 countries and jurisdictions, an Australian thread runs throughout. The agreement was the first announcement to the G20 made by OECD Secretary-General Mathias Cormann, who assumed OECD leadership in June 2021 after serving in a variety of top roles in the Australian government. Furthermore, many of the details are advantageous to Australian businesses. “Pillar one also seeks greater taxing rights in the jurisdiction where the consumer, rather than the producer, is located,” the Canberra Times reported. “The ‘fairer and more stable global tax system’ will suit Australia’s resource-rich economy.”
More Considerations for Entity and Subsidiary Management
By October, the OECD aims to finalise the details of its two-pillar approach. And in just two years, by 2023, the organisation anticipates having a plan for implementation. What does this mean for Australian businesses and multinational corporations with business structures and transactions involving Australia?
More paperwork, for starters. BEPS IF reporting is anticipated to include an annual “country-by-country report” detailing the following for every country in which an organisation does business:
- Pretax income
- Income tax paid
- Income tax accrued
- Number of employees
- Stated capital
- Retained earnings
- Tangible assets
- Specific subsidiaries and their business activities
In Australia, these disclosures will appear in a Master File that any Australian entity part of a multinational entity over a certain threshold (in this case logging more than 1 billion AUD of annual global income in the previous year) will be required to submit to the Australian Tax Organisation (ATO). Noncompliance will potentially result in six-figure fines and, in “exceptional cases,” criminal penalties for the public officer of the Australian entity.
The BEPS Inclusive Framework joins a host of other tax considerations for multinational corporations with business in Australia. Since 2016, the Multinational Anti-Avoidance Law (MAAL) has allowed the Australian Taxation Office to impose penalties of up to 120% of the amount of avoided tax under certain circumstances. Since 2017, Australia has waged a diverted profits tax (DPT) penalty of 40% on profits deemed to have been diverted from the Australian corporate tax base through arrangements that do not reflect economic substance.
Concurrent with these regulations, the ATO introduced the OECD’s concept of “justified trust,” launched in 2016-2017 to deliver assurance that a corporation is paying the right amount of tax.
Achieving such assurance is an involved process. To evaluate whether a corporation qualifies for justified trust status, the ATO focuses on four areas:
- Understanding the taxpayer’s tax governance framework
- Identifying tax risks tagged to the market
- Understanding significant and new transactions
- Understanding why the accounting and tax results vary
In short, scrutiny over tax and reporting is nothing new to Australian companies, particularly the nation’s largest corporations. The G20 agreement, however, makes the landscape even more complicated.
Implications for Oversight and Governance
In such an evolving environment, with heightened stakes for timely, accurate disclosures, it’s more important than ever for Australian governance professionals to have access to the information they need, when they need it.
- General counsels, heads of legal teams and finance executives will require up-to-date assurance that all entities are in compliance.
- Finance and treasury departments will need entity data for tax reporting and financial modelling – e.g., M&A situations.
- Tax departments will require easy access to tax and jurisdiction information, to identify changes and adjust accordingly.
Furthermore, in today’s era of stakeholder capitalism, it’s likely that investors, activists, employees, the media and the public will also be watching — and asking questions. Company secretaries and legal operations teams will need accurate, up-to-date answers at their fingertips, specific to each entity.
With such sweeping ramifications across supply chains and borders, now is the time to start preparing for the new rules, requirements and business considerations of global tax reform.
Ready to take the next step? Find out how Entity & Subsidiary Management from Diligent can help organisations make better decisions backed with data you trust.
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