Research identifies ‘blindspots’ in Australia’s CbC reporting
Mismatches between Australia's country-by-country reporting legislation and requirements set by other countries may create loopholes, analysis by the EU Tax Observatory has warned.
New analysis by the EU Tax Observatory has outlined that while Australia's new country-by-country reporting (CbCR) regime represents a crucial step towards combatting tax avoidance, further improvements to the regime may been needed.
Legislation to implement the new country-by-country reporting was introduced into Parliament last month, with the bill currently before the Senate.
The recent report by the EU Tax Observatory, Australian Public CbCR: filling the gaps?, said the Australian CbCR requirements are more comprehensive in some aspects compared to the EU public CBCR directive, particularly in terms of revenue breakdown and tangible asset reporting.
The Australian law is also expected to cover a substantial number of multinational corporations, including approximately 50 per cent of large US companies and a significant portion of multinationals from countries like China, Japan and Germany.
However, the report also warned that the list of jurisdictions required for disaggregated reporting is missing several tax havens including Luxembourg, Malta, Puerto Rico, Netherlands, Ireland, Cyprus, and the United Kingdom.
"While full country-by-country would be the best option, including these jurisdictions would significantly enhance the effectiveness of the legislation in addressing profit shifting activities," the report said.
"Furthermore, the geographical disaggregation requirements of the Australian CbCR law are less ambitious than current voluntary disclosure practices of some multinational corporations."
This suggests that there is room for more stringent reporting standards without imposing undue burden on companies, the report said.
The research report has made several recommendations aimed at improving Australia's CbCR regime.
"Ideally, full country-by-country reporting without jurisdiction exclusions would provide optimal transparency, minimising potential disclosure loopholes," the report said.
"An alternative approach could involve setting a profit threshold to ensure reporting of at least 90 per cent of each multinational’s profits on a country-by-country basis."
The report also proposed implementing separate reporting for the parent country.
"Separate reporting for a multinational’s headquarters country should be mandated, rather than allowing this crucial jurisdiction to be aggregated with others,"the report said.
"Disaggregating the parent country data provides clearer invaluable insights into where profits are officially booked and taxed especially as usually a large portion of the activities of multinationals are registered."
The report also noted that the current geographical disaggregation proposed by the directive seems to be insufficient to fully understand the global footprint of multinationals.
"The requirement should be changed to have full country-by-country disclosure," it stated.
"This will also level the playing field between foreign and European multinationals."
The information required under the new reporting requirements also needs to be be expanded to include the variables required by the OECD standard, the report added.
"In addition, considering the evolution of the minimum tax agreement it will be crucial to include additional information on wages, destination-based sales and subsidies received by governments," it said.
It is also important that the legislation clearly defines and provides guidance on reporting thorny areas that have caused inconsistencies in previous reporting standards, according to the report.
This includes the treatment of intra-company dividends, the positive/negative sign conventions for tax variables, the inclusion or exclusion of equity-accounted units, and separating stateless income that cannot be attributed to a specific jurisdiction.
Beyond the core financial variables like revenues, profits, and taxes, the report said the reporting requirements could be expanded to include other meaningful variables that shed light on the real economic activities occurring in each jurisdiction.
"Examples are employee compensation, payments to governments beyond income taxes, grants and subsidies, and intangible assets," it said.
The report stressed the importance of the Australian public CbCR rules learning from the limitations of previous CbCR regimes and reporting practices.
"Bringing heightened transparency through expansive country-level disaggregation and well-defined variable requirements will equip stakeholders with more powerful insights," it said.
"This can foster improved risk assessment, evidence-based policymaking, and more effective scrutiny of multinational tax strategies. Ultimately, these steps can help ensure corporations are paying their fair share of taxes commensurate with their real economic activities in each jurisdiction."
