House of Representatives

Explanatory Memorandum

(Circulated by the authority of the Treasurer, the Hon J. B. Hockey MP)

Chapter 2 - Significant global entity

Outline of chapter

2.1 Schedule 1 to this Bill amends the Income Tax Assessment Act 1997 (ITAA 1997) to include a standard and centralised set of concepts that can be used to determine whether an entity is a 'significant global entity'.

2.2 The concept of a 'significant global entity' is used in all three measures in this Bill as part of the 'combating multinational tax avoidance' package announced in the 2015-16 Budget.

2.3 All references to legislative provisions in this Chapter are references to the ITAA 1997, unless otherwise stated.

Context of amendments

2.4 In the 2015-16 Budget, the Government announced a package of measures designed to address tax avoidance and profit-shifting schemes entered into by large multinationals. Specifically, the measures target entities that are part of a multinational group earning significant amounts of income worldwide - AU$1 billion or more annually. Three of the Budget measures - the multinational anti-avoidance law, country-by-country reporting and, increased penalties to combat tax avoidance and profit-shifting - apply to such entities.

2.5 The measures are targeted at these entities because large multinationals have the greatest opportunities to avoid tax through offshore activities and represent the highest risk to Australia's tax base. This is consistent with the Government's commitment to deregulation and small business, and with the recommended approach of the OECD on country-by-country reporting.

2.6 In order to adequately define these types of entities, it is necessary to introduce a new concept into the tax law that can give clarity to taxpayers about whether they are within the scope of the measures to which this definition applies. Existing concepts in the tax law do not adequately capture such entities.

2.7 Division 960 provides a list of general concepts and topics that relate to provisions across the tax law. Inserting the new concept into Division 960 will allow for each measure in this Bill (and any future measures) to reference a centralised definition of 'significant global entity'.

Summary of new law

2.8 Schedule 1 to this Bill amends the ITAA 1997 to include a standard and centralised set of concepts that can be used to determine whether an entity is a 'significant global entity'.

2.9 An entity is a 'significant global entity' for a period if it has annual global income of AU$1 billion or more.

2.10 An entity may also be a significant global entity if it is a member of a group of entities that are consolidated for accounting purposes as a single group and the global parent entity of the group has annual global income for the period of AU$1 billion or more.

Comparison of key features of new law and current law

Detailed explanation of new law

Determining whether an entity is a 'significant global entity'

2.11 An entity is a 'significant global entity' for a period if it is a 'global parent entity' with 'annual global income' of AU$1 billion or more. [Schedule 1, item 3, subsection 960-555(1)]

2.12 It may also be a significant global entity if it is a member of a group of entities that are consolidated for accounting purposes as a single group, and the global parent entity of the group has annual global income for the period of AU$1 billion or more. [Schedule 1, item 3, subsection 960-555(2)]

Global parent entity

2.13 A 'global parent entity' is an entity that is not controlled by another entity according to accounting principles, or, where accounting principles do not apply in relation to the entity, commercially accepted principles related to accounting. [Schedule 1, item 3, section 960-560]

2.14 A global parent entity will usually be a member of a group of entities where the global parent entity is the one that is not controlled by any of the others. Subsidiaries of the global parent may be located in other jurisdictions. However, it is possible for a global parent entity to be a single entity that does not control any other entities.

Annual global income

2.15 If a global parent entity is a member of a group of entities that are consolidated for accounting purposes as a single group, the global parent entity's 'annual global income' for a period is the total of the annual global income amounts of the consolidated group, as shown in total or disclosed in parts in its latest 'global financial statements' for that period. [Schedule 1, item 3, paragraph 960-565(a)]

2.16 Otherwise, a global parent entity's annual global income for a period is the total annual income of the entity as shown in total or disclosed in parts in its latest global financial statements for that period. [Schedule 1, item 3, paragraph 960-565(b)]

Example 2.1 : Calculating annual global income

Hent Inc. is a multinational corporation and has global income, as reported in its global financial statements for the year ended 31 December 2017, of $AU800 million (as translated into Australian dollars).

This same group makes a global acquisition in the year ended 31 December 2018 and as a result reports global income of $AU1.3 billion in that year (as translated into Australian dollars).

For the year ended 31 December 2017, Hent Inc. will not meet the annual global income test and as such will not be a significant global entity for this year.

In the year ended 31 December 2018, the annual global income test is met and as such Hent Inc. will be a significant global entity for this year.

Example 2.2 : Calculating annual global income

Blackbellamy Pty Ltd is a local Australian subsidiary of the large multinational Blackbellamy Worldwide Inc.

In the 2018-19 income year, Blackbellamy Pty Ltd reports $AU60 million of total income as part of the financial statements it is required to prepare under Australian law.

However, in the 2018-19 income year the annual global income of Blackbellamy Worldwide Inc. and its consolidated group, as shown in their global financial statements, is $AU1.6 billion (as translated into Australian dollars).

As Blackbellamy Pty Ltd is a member of a consolidated group with annual global income of over $AU 1 billion, it will be a significant global entity for the 2018-19 income year.

Foreign currency conversion

2.17 When calculating the annual global income of an entity, it may be necessary to translate amounts into Australian currency.

2.18 Under these new provisions, the currency conversion is completed on the basis of the average exchange rate for the period for which the statements are prepared. The method of working out the average exchange rate reflects the existing method in item 1.3 of Schedule 2 to the Income Tax Assessment Regulations 1997. [Schedule 1, item 1, subsections 960-50(7A) and (7B) and item 2, subsection 960-50(9)]

Example 2.3 : Conversion of income amounts into Australian dollars

Murph é Ltd is the global parent entity of a large multinational group and prepares financial statements in a foreign currency. For the year ended 30 September 2017 the annual global income for Murph é Ltd, which includes the total annual income of all members of its group, was reported as $F800 million (where $F is the currency in the jurisdiction in which Murph é Ltd is resident).

In order to test whether the annual global income test is satisfied, the foreign currency is required to be converted to Australian dollars. The average exchange rate for the period for which the statements are prepared (1 October 2016 - 30 September 2017) is $F1 to AU$2.

The annual global income would be greater than $AU1 billion and, as such, Murph é Ltd, and any other entity within its group, will be a significant global entity.

2.19 As part of this currency conversion method, the entity must obtain exchange rates to develop an average exchange rate for the period. This involves getting exchange rates from one or more sources that are not associates of the entity or, as an alternative, from sources specified by the Commissioner of Taxation (Commissioner) in a notice to the entity. To provide additional clarity, the amendments state that this notice from the Commissioner is not a legislative instrument. [Schedule 1, item 1, subsection 960-50(7C)]

Commissioner's determination of the annual global income

2.20 If global financial statements have not been prepared for a period in relation to a global parent entity, the Commissioner may make a determination on the basis of information that is available, where the Commissioner reasonably believes that the entity's annual global income would have been AU$1 billion or more. This allows for administrative flexibility where a global financial statement is not required to have been prepared for a global parent entity. [Schedule 1, item 3, subsection 960-555(3)]

2.21 Allowing the Commissioner to make this determination, will ensure that the measures apply to all entities that are part of a multinational group with annual global income of AU$1 billion or more even where global financial statements have not been prepared.

2.22 If the Commissioner makes a determination that an entity is a significant global entity, the Commissioner must then give a notice of the determination to the global parent entity or to an entity that becomes a significant global entity as a result of the Commissioner's determination. [Schedule 1, item 3, subsection 960-555(3)]

2.23 To provide clarity, the Commissioner's determination is not a legislative instrument. [Schedule 1, item 3, subsection 960-555(6)]

Objecting to the Commissioner's determination

2.24 Where an entity is dissatisfied with the Commissioner's determination that is made in relation to the entity, the determination is reviewable under Part IVC of the Taxation Administration Act 1953. [Schedule 1, item 3, subsection 960-555(4)]

2.25 However, there are special rules that apply to the right of objection on the Commissioner's determination where the entity has also objected to an income tax assessment, relating to the entity, with regard to the application of section 177DA of the Income Tax Assessment Act 1936 (ITAA 1936) (the multinational anti-avoidance law, detailed in Chapter 3 of the Explanatory Memorandum). [Schedule 1, item 3, subsection 960-555(5) and item 5, section 14ZVA of the Taxation Administration Act 1953]

2.26 Where there has been a taxation objection against an assessment involving section 177DA of the ITAA 1936, an objection under subsection 960-555(4) against a determination will not apply in respect to that assessment. However, an objection under subsection 960-555(4) against a determination will apply for purposes other than the assessment involving section 177DA.

2.27 Thus, a taxpayer who is unsuccessful in a taxation objection against an assessment involving section 177DA of the ITAA 1936 can still object to a determination under subsection 960-555(4), but that objection will only apply for purposes other than the assessment covered by that taxation objection. Alternatively, a taxpayer who is successful in a taxation objection against an assessment involving section 177DA that specifically deals with a Commissioner's determination will still need to object under subsection 960-555(4) for purposes other than the assessment covered by the taxation objection.

2.28 In addition, section 175 of the ITAA 1936 applies to the Commissioner's determination in the same way that it applies to an assessment under that Act. [Schedule 1, item 3, subsection 960-555(7)]

2.29 This means that objections against the determination cannot be made with respect to procedural irregularities in the Commissioner's process of making a determination and must instead be made on substantive grounds.

Global financial statements

2.30 The 'global financial statements' of an entity are financial statements that have been prepared in relation to an entity, or that entity and other entities, in accordance with accounting principles and auditing principles.

2.31 If those principles do not apply to the entity, then the global financial statements are financial statements that have been prepared in relation to an entity, or that entity and other entities in accordance with commercially accepted principles relating to accounting and auditing that ensure the statements give a true and fair view of the financial position and performance of that entity (or that entity and the other entities on a consolidated basis). [Schedule 1, item 3, section 960-570]

2.32 'Accounting principles' and 'auditing principles' are linked to definitions of 'accounting standards' and 'auditing standards' in sections 334 and 336 of the Corporations Act 2001. These definitions refer to standards set by the Australian Accounting Standards Board and the Auditing and Assurance Standards Board. [Schedule 1, item 3, subparagraph 960-570(a)(i)]

2.33 The concept of 'commercially accepted' principles is based on paragraph 432(1)(c) of the ITAA 1936. Commercially accepted auditing and accounting principles would usually be the standards in use in the country in which an entity is resident or carries on its principal business activities. These standards are typically developed and enforced by the relevant accounting and auditing authorities in each country. In addition, the standards must ensure that the statements provide a true and fair view of the entity's financial position. [Schedule 1, item 3, subparagraph 960-570(a)(ii)]

2.34 The global financial statement that is relevant for determining whether an entity is a significant global entity is the statement that has been prepared for a period ending no later than the end of the relevant period, and ending no earlier than 12 months before the start of the relevant period. [Schedule 1, item 3, paragraph 960-570(b)]

2.35 Where there are multiple statements that satisfy paragraph 960-570(a), it is the statements for the most recent period that are that are to be used. [Schedule 1, item 3, paragraph 960-570(b)]

Consequential amendments

2.36 Consequential amendments are made to subsection 995-1(1) to include definitions of 'annual global income', 'global financial statements', 'global parent entity' and 'significant global entity'. [Schedule 1, item 4, subsection 995-1(1)]

Application and transitional provisions

2.37 These amendments commence on Royal Assent.

STATEMENT OF COMPATIBILITY WITH HUMAN RIGHTS

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Significant global entity

2.38 This Schedule is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview

2.39 Schedule 1 to this Bill amends the ITAA 1997 to include a standard and centralised set of concepts that can be used to determine whether an entity is a 'significant global entity'.

2.40 The concept of a 'significant global entity' is used in all three measures in this Bill as part of the 'combating multinational tax avoidance' package announced in the 2015-16 Budget.

Human rights implications

2.41 This Schedule does not engage any of the applicable rights or freedoms as it is simply a set of concepts inserted into the tax law to define a type of entity to which other measures apply.

Conclusion

2.42 This Schedule is compatible with human rights as it does not raise any human rights issues.