Clarity provided on tax residency issue with new transparency reporting
Recent commentary from the assistant minister has provided clarity around new reporting requirements for public companies but questions remain for auditors, says CPA Australia.
A release from the government on Friday has helped clarify some of the emerging issues about new reporting requirements requiring public companies to include a consolidated entity disclosure statement (CEDS) in their annual financial reports.
Under legislation passed in March, Australian public companies must report subsidiary information including tax residency in their annual financial statements.
“Importantly, the existing declaration of the directors under the Corporations Act 2001 will be expanded to include a declaration that the disclosures are in their opinion ‘true and correct’ at the end of the financial year,” said CPA Australia.
As part of the reporting, public companies must provide information on tax residency in relation to entities within the consolidated entity.
If an entity was a foreign resident, then the public company must provide a list of each foreign jurisdiction in which the entity was a resident under foreign income tax law.
CPA Australia interim head of policy and advocacy, Ram Subramanian, said that one of the issues that has arisen with the new reporting requirements is how the public company can determine that the disclosed tax residency of each entity within the group is true and correct.
“The determination of corporate tax residency for Australian tax purposes will not always be clear cut, as the ATO has acknowledged in providing the guidance and risk-based framework in PCG 2018/9,” Subramanian said.
“With the release of the PCG, the ATO seems more focused on ‘reasonableness’ basis for determining tax residency having regard to the level of tax risk rather than a strict legal accuracy.”
Subramanian said a release from Assistant Minister for Competition, Charities and Treasury, Andrew Leigh, sought to clarify the issue of whether an entity is a ‘resident’ for Australian tax law purposes by stating:
"Entities will be able to determine tax residency in accordance with the Commissioner of Taxation’s existing public guidance. Entities that apply this guidance in good faith may declare that the tax residency status of a subsidiary is true and correct for the purposes of the new consolidated entity disclosure statement."
“The Assistant Treasurer’s press release would seem to provide some comfort for directors of public companies that they would be able to opine that the tax residency of a subsidiary is ‘true and correct’ for disclosure purposes in interpreting the new law," Subramanian said.
However, Subramanian said the press release still raises questions for auditors about these disclosures.
“There is still a need for the Auditing and Assurance Standards Board to consider how this new threshold for directors on the CEDs will impact the overall audit report as the CEDS form part of the financial report,” he said.
“This will result in increased complexity and uncertainty around financial reports and the responsibilities of an auditor reporting on them.”
CPA Australia said a potential solution for alleviating this uncertainty is for the tax residency disclosure to instead form part of the mandatory tax transparency disclosures such as public country-by-country reporting, currently in a bill before Parliament.
“The parameters set around the correctness of those disclosures should not create complexity for auditors but still seek to achieve the policy objectives,” Subramanian said.
He added that organisations must ensure a robust approach to tax governance practices with more information in the public domain and multinationals’ tax affairs under greater public scrutiny.
“Determining a subsidiary's tax residency will require judgement and an application of the tax laws of at least one country (and potentially multiple countries).”
“Therefore, it will be important to seek appropriate advice both to establish the tax residency of subsidiary entities and, where necessary, take steps to ensure the tax residency is consistent with intended outcomes.”
