New short form country by country reporting raises the bar on BEPS disclosures in Australia

In brief

The Australian Taxation Office (ATO) has recently published its guidance on completing the local file – short form as part of the annual country by country (CBC) reporting obligations in Australia for reporting periods starting on or after 1 January 2024.

The ‘new short form’ requirements go beyond transfer pricing with information requirements aligned to a wide range of base erosion and profit shifting (BEPS) related topics, disclosures of both Australian and non-Australian restructures, and the ATO’s guidance is now over 140 pages in length (in contrast to the prior 8 pages of instructions).

For inbound Australian taxpayers, completion of the new short form will inevitably require information and support from offshore affiliate companies to complete the form accurately.

In essence, the guidance together with the changes to the structure of the local file – short form introduces a significant compliance reporting requirement on all multinationals subject to CBC filing requirements in Australia.

In detail

Background

By way of background, the origin of the short form was the introduction of Subdivision 815-E of the Income Tax Assessment Act 1997 in 2015, with effect from 2016, that was intended to implement recommendations of the OECD in relation to BEPS Action 13 – country by country reporting and transfer pricing documentation.

The Australian legislation introduced a reporting requirement for certain Australian taxpayers to annually provide three statements to the Commissioner in an approved form. As outlined on the ATO website, the statements are:

a CBC report
a master file; and
a local file (comprising of a short form, part A and part B).

Every entity with CBC reporting obligations is required to complete a short form local file, at a minimum. Failure to lodge these on time can carry significant penalties, up to AUD$825,000 per statement.

The ATO announced earlier in 2024 that it intended to change the short form reporting requirements (see our Alerts of 9 October and 21 October for details). The ATO explained that the changes were intended to alleviate concerns within the ATO that the current approach was not consistently 'delivering a sufficient level of information…to detect higher risk international tax structuring and profit shifting arrangements'.

The type of Australian tax risks intended to be identified and addressed extend beyond transfer pricing and include hybrid mismatch outcomes, deductibility, withholding tax liabilities, capital gains tax, and general and specific anti-avoidance. In a number of areas of Australian tax law, certain events or arrangements that occur outside of the Australian taxpayer but within the global multinational group can have an impact on Australian tax outcomes. The new short form will require information on these arrangements (described in this Alert as 'reportable arrangements') to be disclosed in the new short form. For each reportable arrangement, details will be required of the steps involved and a description required of the Australian tax impact and the anticipated global tax impact.

On 24 December 2024, the ATO released the instructions for completing the new short form. The instructions provide the key definitions and explanations of what needs to be reported and how. It runs to more than 140 pages and contains 17 worked examples, in contrast to the prior guidance which only contained 8 pages.

In parallel with (but unrelated to) introducing the new short form, the ATO has eliminated exemptions that were previously available (refer to our separate Tax Alert on these changes for details), which means that a large number of taxpayers will need to complete their first Australian CBC lodgments based on the new guidance.

What is required to be reported in the new short form?

There are three sections of the new short form:

business lines and key competitors
organisational reporting arrangements; and
restructures or new arrangements involving intangibles

Business lines and key competitors

This section requires identification of the number of business lines and function and for each, a text description of:

the business line or function
strategies deployed in the business or function
extent to which the business line or function overlaps with or complements other business lines or functions; and
full names of key competitors.

Internal non-revenue generating functions which are not connected to the development, enhancement, maintenance, protection or enhancement of intangibles, such as human resources, finance, legal and information technology functions are not required to be reported separately.

The business lines and functions reported in the local file should be broadly consistent with the way they are reported in your annual report or other management or reporting documents.

Organisational reporting arrangements

Disclosures are required about the organisation structure and reporting to overseas personnel. There is an upfront question in this section about whether any local personnel are accountable to report to overseas personnel (accountable is not further defined). Where there are local personnel reporting to overseas personnel, further details must be provided about the reporting of the most senior individual in each business line or function, including:

the job title of the local person who is accountable to report overseas (and the name of that person, if available)
the name of the entity employing the relevant local person and the ABN and/or TFN of that entity
the number of overseas managers to whom the person reported
the job title of the overseas manager to whom the local person reported (and their name, if available*)
full name of the entity employing the overseas manager, and the country of residence of that entity
the principal office location of the overseas manager (and the individual’s country of residence, if available); and
description of the functions and activities of the business or operations for which the local individual reported to an overseas manager.

It will also be necessary to report any changes in reporting arrangements during the year, including the dates from which the changes took effect. The examples in the instructions include an example of a person resigning from their position and a new individual taking their role as a reportable change.

Finally, each reporting entity is required to attach a diagram illustrating its organisation reporting structure or provide comments explaining the reporting structure. This is required even where there are no Australian employees reporting to overseas personnel.

Restructures or new arrangements involving intangibles

The ATO has defined a list of reportable arrangements that are now expressly deemed to be reportable for the current year and for the prior year, regardless of materiality or Australian tax impact. These events include:

changes in the direct or indirect ownership of the Australian entity
changes in residency, entity classification or tax status of controlling entities or related parties that the Australian entity engages with (‘related counterparties’), for example US check-the-box elections
changes in the operations, transactions, or structures of related counterparties, including:
- the acquisition or licensing of significant intellectual property by your overseas counterparty from another related party
- restructuring by a related party out of a hybrid structure (either into a structure no longer subject to the hybrid mismatch rules or into a different type of hybrid arrangement)
- changes in related party arrangements that impact the functional profile or remuneration of the Australian operations
restructures in response to the Australian thin capitalisation and debt deduction creation rules
certain asset transfers within multiple entry consolidated (MEC) tax groups; and
new arrangements involving the transfer, licence or creation of intangibles.

In addition to the events above that will always be deemed reportable, other events may also need to be reported if they are significant, having regard to materiality or potential Australian tax risk. Examples of other potentially reportable events include:

significant changes in the nature or characterisation of the Australian entity’s assets, operations obligations or related party payments, including:
- disposal, acquisition or transfer of assets or liabilities
- changes in the nature or characterisation of international related party arrangements, such as replacing a sale of products transaction with a service arrangement; and
- commencement, cessation, or relocation of business lines or operations (including branches) or those of your controlled foreign entities
significant changes in your related counterparties’ operations, transactions or structures that may impact the nature or character of your payments or operations
changes in your related party financing arrangements, including:
- introduction of significant or new material cross-border related party financing arrangements
- termination of significant or material existing cross-border related party financing arrangements (other than termination due to repayment upon maturity)
- replacing significant or material cross-border related party borrowings with external credit arrangements; and
- changes in significant terms or conditions of existing related party financing arrangements, such as changes in the parties, tenor or payment dates, rate, currency denomination, or indemnification or security arrangements.

For related party financing arrangements only, a materiality threshold of AUD 10 million (based on the principal value of the arrangement) has been set. For other potentially reportable arrangements, judgment will be required to evaluate the materiality and significance. This requires consideration of the financial and operational impacts of the change, as well as the potential Australian tax risks for the year of the event and future years.

The ATO has defined some changes that will not be treated as significant for the purpose of these disclosures, such as organic changes in the business, third party revenue growth, changes in third party suppliers, and certain related party dealings that occur in the ordinary course of business such as dividend payments that are not connected to reportable arrangements.

For each reportable arrangement, disclosures are required about:

the type of event
a description of the event
capital value of the event
anticipated Australian and global tax impacts
the commercial context and anticipated commercial impact
the number of steps involved (including all connected steps involving international related parties)
whether a step plan is available, and if so, attaching a copy of that plan
further details on each step involved, including:
- date of the step
- type of step
- description of the step
- whether the step resulted in a change in functional characterisation (and if so, details of the change); and
- parties involved in the step.

The minimum number of disclosure fields for a reportable arrangement will be 24, and if there are several steps involved, many more disclosures may be needed. For instance, the ATO instructions include an example of an arrangement involving six steps which requires more than 100 disclosure fields.

Australian entities will need to work together with their offshore/group tax teams to identify whether any relevant reportable arrangements have occurred in their group during the current or prior year. The ATO’s expectation is that Australian taxpayers should make reasonable documented inquiries of offshore group personnel who may possess the relevant information, such as their parent company and group tax team.

Given the new definitions will need to be considered for both the current and prior years, for taxpayers who have already submitted a prior year short form, it is possible that additional prior year arrangements will now be reportable that may not have been included in the prior year disclosures based on the prior instructions.

Format of reporting

The new short form will need to be prepared and filed in a specific XML format designed by the ATO. Files that do not meet the format requirement or pass validation rules will not be able to be submitted. Software will be required to produce a file in the correct format.

Consequences of not reporting

Taxpayers who fail to comply with their reporting obligations may be subject to failure to lodge penalties of up to AUD$825,000.

Taxpayers should also be aware of the existing penalty regime for false or misleading statements which can result up to AUD$39,600 per statement, and a statement in this context may be any of the individual fields required in the new short form. While these rules have not changed and apply generally to all tax statements, there may be difficulties for some Australian taxpayers where they do not have sufficient access to records or information offshore and are reliant of personnel outside of Australia. As noted above, the ATO has indicated that entities are expected to undertake reasonable, documented enquiries of offshore group personnel who may be expected to hold relevant information, including personnel of the overseas parent and group tax area.

Interaction with other Australian filing requirements

There is some overlap between the disclosures required in the new short form and other ATO disclosures, including in the international dealings schedule (IDS), reportable tax position (RTP) schedule, and Parts A and B of the local file. The ATO has indicated that it intends to revise the 2025 RTP Schedule instructions to permit taxpayers to indicate they will provide relevant information in the short form rather than duplicating it in the RTP Schedule. The ATO is considering similar opportunities for IDS disclosures that may duplicate some of the new short form disclosures.

As it currently stands, the definitions for the disclosures required in each of these forms are not 100% aligned, so taxpayers will need to carefully consider the required disclosures in each to comply with their reporting obligations.

The takeaway

Taxpayers should not underestimate the resource and effort that could be required to complete accurately the new short form.

The ATO’s view is that the reporting requirements as reflected in the new short form and related guidance, are consistent with the OECD’s Action 13 recommendations. Furthermore, the ATO’s view is that much of the information required would already be available to taxpayers and will have been considered by them in completing their tax returns on a self-assessment basis. The practical reality for many taxpayers may be that the level of detail expected for reporting may be beyond that captured in the ordinary course of business and as such there will be some effort required to comply.

For calendar year end taxpayers, the first filing date under this new format will be 31 December 2025 in respect of the preceding year.

We recommend engaging early with key internal stakeholders to understand and identify any potential reportable arrangements and other information requirements that may not be within the possession of the Australian management team. Given the breadth of the definitions, it is likely that even minor changes in ownership structures or transactions and operations offshore may need to be reported in Australia.

It will also be critical to ensure that disclosures within the new short form are consistent with other filings required with the ATO such as the master file, the RTP schedule, the CBC report filing and the corporate income tax return given the overlap and interaction between these forms and disclosures as well as other documents in the public domain, e.g. Global Financial Statements.

This change has highlighted the importance of having a connected compliance strategy across all filings.