‘Resource constrained’ firms unprepared for CbC reporting: Grant Thornton

Early last year, the ATO announced it would be setting tougher country-by-country (CbC) reporting requirements to boost transparency and combat multinational tax avoidance. The new rules apply for reporting periods starting from 1 July 2024.

Resourcing would pose a key challenge for firms in adhering to these new obligations as they grapple with a raft of new reporting requirements, Jason Casas, partner at Grant Thornton Australia, told Accounting Times.

“Multinationals have had to contend with a raft of new legislation including thin capitalisation, global minimum tax rate and public Country-by-Country reporting,” Casas said.

“Many companies have become resource-constrained and are only now able to dedicate resources to understand the full extent and impact of these requirements.

“There will be a need to coordinate with overseas group entities (typically headquarters) and this will require additional time to complete the local file. With fines of up to $825,000 for late lodgements, being prepared is key to meeting the new requirements.”

According to Casas, restructures will be one of the most challenging disclosures for businesses to complete.

“Transactions occurring between overseas members of the group related to a restructure may need disclosure, despite the Australian taxpayer having no direct involvement,” he said.

Under the new reporting requirements, the Tax Office will be paying close attention to companies’ business structures and strategies, including the flow of assets between countries.

“The ATO continues to closely scrutinise restructures, intangibles and financing arrangements. Amongst these, financing arrangements are the most common for companies,” Casas said.

The Tax Office has zeroed in on these kinds of transactions as they allow multinational entities to shift profits from high-tax countries such as Australia to lower-tax jurisdictions.

While these types of transactions can be legitimate, almost half (562) of the 1253 multinationals who paid no tax in Australia did so by incurring an accounting loss, according to 2022-23 ATO tax data analysed by QUT tax expert Kerrie Sadiq.

“Where a deduction is allowed in a high tax jurisdiction, such as Australia, and income is included in the profits of a low tax jurisdiction, such as Singapore, the result is larger overall global profits,” Sadiq wrote for The Conversation.

The ATO’s 2022–23 corporate tax transparency report showed that 31 per cent of large companies operating in Australia did not pay tax to the ATO.

However, the report gave little information regarding how 1,200 companies in Australia avoided their domestic taxes, according to Sadiq.

“The main driver for change is due to the ATO identifying companies that have been consistently able to make incomplete disclosures under the old reporting regime,” Casas said.

“The government and the ATO have placed themselves at the forefront of combatting base erosion and profit shifting. One strategy has been to increase transparency and the compliance burden on multinationals,” he added.

The CbC reporting reforms will provide more granular information to the public on multinationals’ business operations, enabling greater scrutiny of multinational tax avoidance schemes.