New laws make it harder for large companies to avoid paying tax
New laws to make it harder for large Australian and foreign companies to avoid paying tax, write Rodney Brown and Kerrie Sadiq
The beginning of the financial year means that, for the first time in Australia, the public will see previously unreleased tax reports produced by multinational taxpayers.
These documents, known as country-by-country reports, or CbCR for short, contain information about the tax practices of large Australian businesses and foreign businesses operating in Australia. This information, previously only available to the taxpayer and the Australian Tax Office, will be made public.
Country-by-country reports, announced in the October 2022-2023 budget, were introduced with other measures designed to improve corporate tax behaviour. The reports will be released from this week as part of corporate reporting practices. Multinationals have 12 months to comply.
A fairer tax system
Country-by-country reporting forms part of the government’s multinational tax integrity election commitment package. The aim is to ensure a fairer and more sustainable tax system. Large firms will be required to publish a statement on their global activities, plus tax information for each jurisdiction in which they operate.
Until now, large multinationals only had to prepare annual consolidated financial statements under international financial reporting standards. The traditional reports aggregate results and provide limited geographic reporting information.
Learn more: Large companies pay zero or low Australian income tax: Why?
Traditional high-level reporting allows multinationals to conceal their country-level activities. This hides questionable tax practices.
Country-by-country reporting allows us to better understand where a multinational operates. More importantly, it reports the amount of activity in each jurisdiction. The information provides clues as to whether artificial profit shifting has occurred.
Anyone interested can uncover details about how multinationals structure their global operations. Information may reveal a misalignment between the company’s real economic presence in a country, the profits they book and taxes they pay in that country.
Bringing Australia into line with the EU
Country-by-country reporting is not new. It is the requirement that the information be made public that has changed.
Australian firms have been required to provide such reports to the Australian Tax Office since 2016. However, the information has been confidential.
The new public disclosure law brings Australia in line with large firms operating in the European Union which brought in the change last year.
How country-by-country reporting works
A taxpayer with annual global income above A$1 billion and at least A$10 million of its turnover Australian-sourced will need to produce a report. The obligation to disclose rests with the parent entity, no matter where they are located.
Australia’s largest companies, including mining giants Rio Tinto and BHP, biotech firm CSL, and investment bank Macquarie Group, will be among those expected to report, as will foreign tech behemoths such as Apple, Amazon, Microsoft and Meta.
These tech giants are the same US firms likely to be excluded from the global minimum tax rules under a G7 agreement reached last week. Under the agreement, US multinationals were exempted from paying more corporate tax overseas. Other G7 members gave in to protect their own companies from the US’s threat of retaliation.
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Under the law change in Australia, a parent entity will provide its name, the names of all members of the group, a description of their approach to tax, and information about operations in certain countries. Included on the list are countries that attract multinationals due to reduced tax obligations, such as Singapore, Switzerland, and the Bahamas.
Everyone will be able to see where a multinational is operating. They will also see the types of business activities conducted, the number of employees, assets, revenue, and taxes paid. Large profits in a country but little business activity and very few employees may raise questions, especially if a country has a low tax rate.
Benefits of better transparency
Access to the extra information will help investors assess the tax and reputational risk of a firm. A multinational that shifts profits to low tax countries may be audited and pay extra tax and penalties.
Increased transparency allows greater scrutiny. In turn, it is hoped multinationals will reduce aggressive tax planning due to potential risk to their reputation.
If multinationals shift less taxable profits out of Australia to low-tax or no-tax jurisdictions, this will lead to Australia receiving a greater share of much needed corporate tax revenue.
Reducing profit shifting
Recent academic research on public country-by-country reporting reveals it provides additional information to better identify tax haven activity. However, it does not result in a significant drop in corporate tax avoidance.
Increased tax transparency helps investors and tax authorities to better understand a multinational’s economic and tax geographic footprint. It is also important when it seems that US giants will be excluded from the 15% global minimum tax rules. Transparency by itself, however, does not lead to multinationals paying more corporate taxes.
By its very nature, tax avoidance is legal but pushes the boundaries by going against the spirit of the law. Indeed, many large multinationals argue tax is a legal obligation and is not voluntary. They maintain they pay the tax required of them according to the law.
Undoubtedly, Australia’s new public country-by-country regime is a positive step for tax transparency. As a country initiative, it has been applauded as groundbreaking and world-leading. However, it is not a panacea to corporate tax avoidance.
To limit corporate tax avoidance and have multinationals pay more corporate taxes, we must get to the heart of the problem. We must change the law that dictates the way multinationals are taxed.
Kerrie Sadiq is Professor of Taxation, QUT Business School, and ARC Future Fellow, Queensland University of Technology. Rodney Brown is a Senior Lecturer at UNSW Business School. A version of this post first appeared on The Conversation.