ATO announces key changes to Country-by-Country (CbC) reporting regime

The Australian Taxation Office (ATO) has recently introduced significant changes to the Country-by-Country (CbC) reporting regime. 

The two main areas of change include:

1. Introduction of a new Short Form Local file; and 
2. Updated exemptions and administrative relief guidance. 

Overview of Australia’s CbC reporting regime

Australia’s CbC reporting regime requires each of the following to be submitted each year for eligibility entities: 

1. CbC report
2. Master file
3. Local file.

The Australian Local File looks quite different from a standard OECD Local File with a more detailed focus on transactional information, which at a high level, includes each of the following sections: 

• Part A – Transactional information 
• Part B – Intercompany agreements etc. 
• Short Form Local File

Short Form Local File Updates

The Short Form Local File previously covered 5 key areas including Organisational Structure, Business and Strategy, Business Restructures, Transfer of Intangibles and Key Competitors. This was free text and included as an attachment in the Local file submission, leading to significant variability in detail and information across taxpayers.

After several years of CbC reporting, the ATO determined that this approach did not provide the expected level of information and allowed for inconsistent reporting. Consequently, a new Short Form Local File has been released, effective for periods starting on or after January 1, 2024.

The new Short Form Local File is included in Version 4 of the xml schema and now incorporates validation rules. While the focus remains on the five areas noted above, there are now detailed and prescriptive questions which taxpayers must complete, with an enhanced focus on details relating to business restructures and intangible related transactions. 

These additional questions from the ATO will no doubt require additional work from taxpayers, particularly in the first year as they adapt to the new definitions and instructions that are significantly more comprehensive than the previous Short Form Local File instructions. The change aligns with the ATO’s increased scrutiny regarding CbC reporting over the past 12 -18 months.

Exemptions and administrative guidance 

As part of the introduction of CbC reporting in Australia, the ATO provided several exemptions and administrative concessions for taxpayers. These were often in the form of a Fast Track Exemption, allowing taxpayers to self-assess their fact pattern and notify the ATO of any exemptions being applied. For example, an exemption for the Master file could be sought if Australia was the only jurisdiction where the global accounting group had an obligation to lodge a Master file.

However, exemptions made from January 1, 2025, must comply with the new exemption requirements. While the ATO has retained some exemptions, the number available has reduced from seven to three.

Despite the reduction in available exemptions, the ATO has indicated that the process will be more complex, with the Fast Track Exemption process no longer available. Instead, an evidence-based approach will be used when reviewing and approving exemption requests, involving scrutiny of evidence and comparison to information included in financial statements and income tax returns. Given the ATO service standard of 28 days, exemption requests are expected to take significantly more time than in previous years.

Although this process has been formally announced to begin on January 1, 2025, these practices have been evident over the last 1-2 years, and this update appears to align the guidance with current ATO practices.

Key Takeaways 

1. Taxpayers should be aware of the increased data requested in CbC compliance filings, with changes to the Short Form Local File. 
2. Taxpayers should expect a high level of evidence and scrutiny to be provided by the ATO with any CbC reporting exemption requests.  
3. Given the CbC reporting changes and increased focus on CbC reporting by the ATO, taxpayers should be conscious of any SGE late filing penalties.

FOR MORE INFORMATION

If you would like to learn more about the topics discussed in this article, please contact your local RSM office.