New Tax Residency Financial Statement Disclosure Requirements For Public Companies

Significant changes to Australia's corporate reporting rules aimed at increasing transparency of the tax practices of multinational companies are about to take effect.
Australia Tax
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Significant changes to Australia's corporate reporting rules aimed at increasing transparency of the tax practices of multinational companies are about to take effect.

The Treasury Laws Amendment (Making Multinationals Pay Their Fair Share – Integrity and Transparency) Act 2024, received Royal Assent on April 8, 2024, introducing a requirement for all public companies to include a "consolidated entity disclosure statement" in their annual financial reports. Whilst this piece of legislation mainly dealt with thin capitalization changes that have received substantial coverage, the new corporate reporting rules were also introduced and may have been overshadowed.

Detailed explanation

Effective for financial years commencing on or after July 1, 2023, public companies must disclose detailed information about each entity within their consolidated group as of the end of the financial year. For many Australian public companies, this will be for the year ending 30 June 2024.

With the impending timeline, many companies will have limited time to prepare their consolidated entity disclosure statements.

The disclosure requirements include:

  • The entity's name
  • Legal structure
  • Country of incorporation or formation
  • Percentage of issued share capital held
  • Australian or foreign tax residency status
  • A list of foreign jurisdictions where the entity is considered a tax resident.

Identifying and documenting all subsidiaries, including their tax residencies, in a manner sufficient for an external auditor to provide assurance, may be a significant undertaking, particularly for companies with complex group structures.

The introduction of these new disclosure requirements represents a significant step toward enhancing corporate tax transparency in Australia, aligning with global efforts to scrutinise the tax practices of multinational corporations more closely.

Background and Disclosure Guidance

The policy intent behind these amendments is to enhance the scrutiny of how multinational companies structure their tax arrangements across different jurisdictions through their subsidiaries. This form of reporting aligns with international approaches to improve corporate tax transparency, such as those implemented in the United Kingdom.

The consolidated entity disclosure statement is a separate component of the annual financial report, distinct from the financial statements, notes and directors' declaration. Directorswill be required to state in their declaration whether, in their opinion, the consolidated entity disclosure statement is "true and correct". Additionally, listed companies' chief executive officer (CEO) and chief financial officer (CFO) must also certify the accuracy of the statement.

While the disclosure requirements are more extensive for companies required to prepare consolidated financial statements under accounting standards, all public companies, including unlisted entities, must provide a consolidated entity disclosure statement. However, companies not required to present consolidated financial statements need to only include a statement to that effect.

The amendments do not require disclosure of information for investments in associates and joint ventures, as they are not consolidated entities.

Importantly, the "true and correct" certification for the consolidated entity disclosure statement is a higher standard than the "true and fair" declaration used for financial statements, implying a greater level of precision is required.

Audit Requirements

As part of the annual financial report, the consolidated entity disclosure statement will be subject to audit by the company's external auditors. Hence, it is recommended that companies seek independent tax advice where required for these disclosures.

However, auditing and assurance standards for this new disclosure have not yet been finalized by regulators and audit firms. The Auditing and Assurance Standards Board (AUASB) in Australia is still considering the appropriate auditing requirements and guidance.

Key Challenges

Governance & Documentation

Auditors will likely need to obtain sufficient and appropriate audit evidence to support the detailed tax residency and corporate structure information disclosed for each consolidated entity.

For large multinational groups with complex structures spanning multiple jurisdictions, gathering this evidence could be challenging. Determining tax residencies will require input from tax specialists to ensure an independent view is able to be provided of the standard required.

Ensuring that appropriate tax risk governance and management is in place will be critical to the technical analysis for tax residency as well as the documentation and evidence being available to substantiate the new requirements.

True and Correct Certification

As mentioned, directors as well as CEOs/CFOs must certify the statement as "true and correct" – a higher standard than "true and fair" for the financial statements.

This implies auditors will need high level of assurance that disclosures are precisely accurate. Materiality assessment may be more challenging given the precisely-worded certification.

While full auditing guidance is still forthcoming, it is clear auditors will be held to a higher standard of assurance over this tax transparency disclosure compared to other components of the financial report. Coordination between auditors, management and tax teams will be critical.

The terms "true and fair" and "true and correct" have important distinctions in the context of financial reporting and disclosures

True and Fair

"True and fair" refers to the standard certification provided by directors in the directors' declaration for the financial statements and the term is aligned with the following descriptions:

  • Financial statements are free from material misstatements and give a true and fair view in accordance with the applicable accounting standards.
  • Allow for the use of best estimates and some immaterial inaccuracies, as long as the overall financial statements are not materially misstated.
  • Based on the accounting concept of materiality – items are material if their omission or misstatement could influence the economic decisions of users.

True and Correct

"True and Correct" is the higher standard of certification required for the new consolidated entity disclosure statement. It implies the disclosures must be accurate and precisly correct in all respects, with no inaccuracies permitted.

There is no allowance for immaterial misstatements or the use of estimates. Further, the standard sets a higher bar than "true and fair" and demands more precise and exact reporting.

The key difference is that "true and correct" requires absolute accuracy and completeness of the information disclosed, with no room for immaterial deviations. In contrast, "true and fair" allows for some approximations and use of best estimates, as long as the overall financial statements are not materially misstated.

This distinction is significant because directors and CEOs/CFOs could potentially face harsher penalties for false or misleading "true and correct" certifications compared to materiality-based judgments involved in a "true and fair" view. The heightened "true and correct" standard for the tax disclosure reflects the government's emphasis on fully transparent and precise reporting in this area of high public interest.

A significant challenge will arise where there are uncertainties in relation to the tax residency of subsidiary entities or where there are numerous subsidiaries within a group and some have been considered immaterial previously and resources have not been dedicated to the tax analysis on residency.

How A&M Can Help

A&M has accounting expertise in the Australian IFRS requirements as well as the tax expertise to help companies navigate and conclude on the tax residency of their subsidiaries around the world for disclosures in their financial reports. We can also assist with implementing or enhancing governance processes to ensure alignment with the increased reporting requirements.

Originally published 25 June 2024

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.

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