Significant Global Entities versus the ATO
Tax avoidance by multinational corporations remains a contentious issue for the Australian Taxation Office (ATO). An article in the Sydney Morning Herald back in April 2016 revealed that large multinational companies had reduced their tax bill by a combined $5.4 billion across 2013 and 2014 by offloading profits to offshore divisions.
This prompted the implementation of the Tax Laws Amendment (Combating Multinational Tax Avoidance) Act 2015 (the Amendment) and an amendment to the Taxation Administration Act 1953, which requires Significant Global Entities (SGEs) to lodge general purpose financial reports (GPFRs) with their annual tax returns if reports are not lodged with Australian Securities and Investments Commission (ASIC). The GPFRs will then be lodged with ASIC and put on the public register. The SGE may also be required to lodge transfer pricing documentation within 12 months after the end of each income year. The above measures commenced on 1 July 2016.
A SGE is defined on a periodic basis for both Australian-headquartered entities and local operations of foreign-headquartered multinationals by the Income Tax Assessment Act 1997, if it is one of the following:
- A 'global parent entity' whose 'annual global income' is A$1 billion or more;
- A member of a group of entities consolidated (for accounting purposes) where the global parent entity has an annual global income of A$1 billion or more.
The application of the Amendment and the provision of GPFRs will allow the ATO to better determine if any tax advantages have been gained, and allow the application of the Multinational Anti Avoidance Law (MAAL) to impose a Diverted Profit Tax (DPT).
MAAL gives the Commissioner the ability to cancel any tax benefits an SGE, and its related parties, obtained by the scheme and will also open the SGE up to increased penalties for tax shortfalls arising from its application. The increased penalties include a levy of 40% on the diverted profits, payable within 21 days of an assessment.
The ATO explains that an entity is also a SGE for a period when the Commissioner makes a determination in relation to the relevant global parent entity, where:
- Global financial statements have not been prepared, and;
- It is reasonable to conclude that the annual global income of the global parent entity would have been A$1 billion or more.
In addition, from 1 July 2017 administrative penalties are doubled if it is found that the SGE:
- Did not take reasonable care in preparation of GPFRs;
- Applied a tax position that is not reasonably arguable;
- Is unable to provide documents when required and the Commissioner determines the liability without the document.
Failure to Lodge penalties have also increased and can carry penalties up to $525,000 if over 112 days late.
The Amendment will allow the preparation of GPFRs using Reduced Disclosure Requirements, if the SGE is not publicly accountable, and does not specifically require the GPFRs to be audited. The ATO recommends that evidence be kept to demonstrate that the GPFRs have been prepared in accordance with Australian Accounting Standards/International Financial Reporting Standards (IFRS) and that the best way to demonstrate this is through an audit.
For further information regarding SGEs, and guidance on the switch from special purpose to general purpose financial reports please contact your local PKF office.