This year's budget includes a number of new integrity measures announced
by the Treasurer which will strengthen the Australian Taxation Office's
ability to tackle multinational tax avoidance...
Multinationals with revenue over $1 billion, which covers 90 per cent of
all multinationals' revenue in Australia, will be subject to a new stronger
anti-avoidance rule. This will capture artificial or contrived arrangements
that are designed to avoid a taxable presence in Australia...
The Government will [also] adopt the OECD's Country By Country reporting
standards which start after 1 January 2016. Multinationals will be required
to provide the ATO with a comprehensive picture of their worldwide operations,
including subsidiaries, wherever they are located. This will be in addition to
new transfer pricing documents which show the revenue, the profit, the tax
paid and the number of employees in each country it operates.
Australia may be the first, but it certainly won’t be the last. The widespread adoption of CbC reporting standards has been anticipated by many as one of the most immediate and concrete results of the OECD's BEPS project. (For more, here’s the OECD’s guidance on the subject.) Whether or not CbC reporting results in any changes to where multinationals report income and pay taxes, it will certainly have a big impact on them in terms of pure discomfort.
First, there are practical issues for multinationals to consider. Are accounting systems and practices consistent across its subsidiaries? Are there any differences in how CbC reporting is interpreted in the various jurisdictions in which it does business? Are adequate internal resources available to meet this new regulatory requirement?
But more significantly, there are substantial strategic considerations as well, both from external and internal perspectives. Many multinationals (particularly non-public ones) do not even share detailed information about the profitability of each group entity with their own employees. Now every entity within a multinational group is going to know a lot more about the income earned and taxes paid by every other entity within that group, for better or worse.
Externally, this new financial transparency to the outside world means that a company’s tax footprint could become a public relations issue like never before. Not long ago Starbucks decided to voluntarily pay more taxes than it needed to in the UK in order to mitigate a perception that it was a bad corporate citizen for not paying its fair share of taxes. CbC reporting makes it more likely that many other multinationals will soon find themselves facing the same choice.
As a result, a multinational group's transfer pricing practices and documentation can no longer be viewed as techinical details or simple compliance exercises. Increasingly, they will have to be treated as a reflection of a company's broad strategic vision, and how it wishes to be viewed by the world.
*Note, the EU has something similar to CbC reporting in place, but only within the EU and only for certain types of firms such as financial institutions.