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Mandatory disclosure of aggressive tax arrangements

The Government has issued a Discussion Paper on the Organisation for Economic Co-operation and Development’s (OECD) proposals for Mandatory Disclosure Rules. These require tax advisers and/or taxpayers to make early disclosures of aggressive tax arrangements (often before income tax returns are lodged), to provide tax authorities with timely information on arrangements that have the potential to undermine the integrity of the income tax system.

The purpose of the Paper is to seek community views on how Mandatory Disclosure Rules should be framed in the Australian context, having regard to the disclosure rules that are currently available to the Australian Taxation Office (ATO). The Paper also provides an outline of the key recommendations of the OECD, and the Government's preliminary views in relation to those recommendations.

Voluntary tax disclosure code

In February 2016, the Board of Taxation provided a Report to Government on a voluntary tax transparency code (TTC) which, in delivering the 2016-17 Budget, the Government has embraced as one of the key elements of a stronger tax compliance regime, encouraging all companies to adopt the TTC from the 2016 financial year onwards. The TTC designed by the Board is a set of principles and ‘minimum standards’ to guide voluntary disclosure of tax information by businesses. The Board expects that the TTC will evolve over time in response to changes in corporate governance practices, the legal and commercial environment, and developments in global tax transparency initiatives.

The TTC is divided into two Parts, with the Board recommending that both Part A and Part B be adopted by large businesses (being businesses with aggregated 'TTC Australian turnover' of AUD 500 million or more), while medium businesses (being businesses with aggregated TTC Australian turnover of at least AUD 100 million but less than AUD 500 million) adopt Part A only. 

Under Part A, businesses would, as a minimum, disclose the following information:

  • A reconciliation of accounting profit to tax expense and to income tax paid or income tax payable
  • Identification of material temporary and non-temporary differences
  • Accounting effective company tax rates for Australian and global operations (pursuant to Australian Accounting Standards Board (AASB) guidance).

Under Part B, businesses would, as a minimum, disclose the following information:

  • Approach to tax strategy and governance
  • Tax contribution summary for corporate taxes paid
  • Information about international related party dealings.

Some large businesses already report this type of information publicly (for example, an Extractive Industries Transparency Initiative report or a European Union Tax Directive report) however, for others this would be a significant increase in public transparency on their tax affairs and an increase in compliance costs.  As stated in the Report, the TTC is a voluntary minimum standard of content and it is expected that some businesses will choose to provide additional disclosures.

The Report does not recommend additional oversight or penalties for misleading disclosure of TTC information. However, in reaching this conclusion, the Board had regard to existing sanctions under other laws for providing misleading disclosure such as sanctions under Australia's company law. Under the TTC, businesses would make their TTC report publicly available (for example, by publishing it on the business’ website) and provide the ATO with a link to the report for inclusion in a central website that provides a link to all publicly-issued TTC reports.  It would be expected that the AASB will develop guidance material to assist businesses in meeting the standard required by the TTC, and to establish a common definition of the term ‘effective tax rate’ to ensure consistency, including addressing issues such as amended assessments, impairments and foreign currency translation.

Finally, in its report the Board states that "the TTC is more advanced and more comprehensive than existing tax transparency measures from other countries and organisations.  However, due to the flexibility in the TTC the Board has received strong support from businesses and associations and expects it to be widely adopted".

Protection for whistleblowers disclosing tax avoidance behaviour

The Government will introduce new arrangements to better protect individuals who disclose information to the ATO on tax avoidance behaviour and other tax issues. This measure is to take effect from 1 July 2018 and under the new arrangements, individuals, including employees, former employees and advisers, disclosing information to the ATO will be better protected under the law.

Substantial increase in penalties for failing to meet disclosure requirements

A significant increase has been proposed in the maximum penalties that can apply for failing to disclose information to the ATO. This will apply to ‘significant global entities’ (i.e. entities that are part of a group with global turnover of $1 billion or more). The new maximum penalty will be $450,000 (up from the current $4,500) for failing to meet disclosure obligations. For example, this would include entities that fail to meet their reporting requirements under the Country-by-Country reporting legislation that was enacted in 2015.

In addition, penalties relating to making statements to the ATO will be doubled, increasing the penalties imposed on multinational companies that are reckless or careless in their tax affairs. 

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Nick Houseman

Australian Transfer Pricing Leader, PwC Australia

Tel: +61 2 8266 4647

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