New regulations for Transfer Pricing (TP), Country-by-Country (CbC) reporting and General Purpose Financial Statement (GPFS) reporting regimes impose a heavy compliance burden on multinational enterprises doing business in Australia. Below are the annual review and reporting requirements for TP, CbC and GPFS documentation necessary for companies to avoid the hefty penalties.
Transfer Pricing documentation
In Australia there are heavy tax compliance obligations on entities engaging in International Related Party Dealings (IRPD). These obligations include having to demonstrate that all such dealings are based on the 'arm's length principle', and maintaining adequate TP documentation to support the contention that the entity is compliant.
To qualify as compliant, the TP documentation must:
- be prepared concurrently, i.e. before the relevant tax return is lodged;
- explains the method used to identify the comparable arm's length circumstances; and
- details how the taxpayer's transfer pricing policy is consistent with the Organisation for Economic Cooperation and Development's (OECD) guidance contained in documents including 'Model Tax Convention on Income and on Capital' and 'Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations.'
Guidance issued by the Australian Tax Office ('ATO') stresses that taxpayers have to set up a process to not only establish their transfer prices but regularly monitor and review them, to take into account changes in the size and complexity of the transactions as well as in the environment, e.g. the entry of new competitors.
Having adequate and compliant TP documentation will greatly:
- reduce the risk of audits and disputes with the ATO by providing a 'reasonably arguable position'; and
- mitigate penalties in the event of an audit adjustment.
The new CbC reporting rules, which apply to Significant Global Entities (SGE), impose extensive annual reporting and ATO lodgement requirements on the SGE with respect to various CbC files (namely, a CbC Report, a Master File and a Local File).
All CbC files must be lodged with the ATO within 12 months from the end of the period to which they relate. However, given that some global parent entities have different reporting periods to their Australian subsidiaries and with the ATO's practice in granting replacement reporting periods, it is likely that this deadline is notably shorter for the Master File.
Accordingly, vigilance and early action must be taken in this respect. If an entity is an SGE and such SGE is an Australian resident or a foreign resident operating an Australian permanent establishment, it is required to undertake CbC reporting to the ATO within strict time limits.
An entity is an SGE for the relevant 12 months period ("the Period") if it is one of the following:
- a global parent entity whose consolidated annual global income is AU$1 billion or more; or
- a member of a group of entities consolidated (for accounting purposes) where the global parent entity has an annual global income of AU$1 billion or more.
GPFS reporting requirements
The new GPFS Reporting rules, which also apply to SGEs (as defined above), impose annual reporting and ATO lodgement requirements on the SGE with respect to general purpose financial statements.
The only exemption to GPFS reporting requirements applies where the SGE is an entity that has lodged GPFS with the Australian Securities and Investment Commission ("ASIC") within the time provided under subsection 319(3) of the Corporations Act 2001.
GPFS must be lodged with the ATO on or before the day the SGE is required to lodge its income tax return for the relevant income year.
As for reporting content, applicable reporting period and permissible accounting standards under the GPFS reporting rules are restrictive and often differ significantly from the financial reports that the SGE would have been preparing in the past. Hence, it is urged that SGEs identify and commence preparation of GPFS as early as possible.
Penalties for non-compliance can be very severe. Typically multinational enterprises would be exposed to late lodgement penalties starting from AU$105,000 and doubled administrative penalties.
Given these requirements and the risk of severe penalties, we recommend clients prepare appropriate TP, CbC and GPFS documentation before tax return lodgement time and seek professional assistance to ensure and monitor compliance. Now is the time to perform your annual review.
Talk to us
Fulfilling all the reporting requirements in Australia may not be the easiest task. TMF Australia monitors changes to all rules and local regulations, hence we can provide assistance with the reporting and payment of the withholding amount to the ATO in ensuring compliance with these rules.
Want to know more? Contact our experts in Australia.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.