Introduction:
The Australian Taxation Office (ATO) is in the process of finalising substantial modifications to the Australian local file (ALF), particularly the short form local file (SFLF), for reporting periods beginning on or after 1 Jan. 2024. These changes, set to impact country-by-country (CbC) reporting entities, represent a significant shift in reporting requirements and compliance obligations. This article outlines the key aspects of these proposed changes and their implications for tax professionals and their clients.
Background:
The local file has been an integral part of Australia’s CbC reporting regime. Historically, CbC reporting entities (CbCREs) have been required to submit an SFLF attachment disclosing specific information about their Australian operations, including organisational structure, business strategy, restructures, intangible transfers, and key competitors.
Key Proposed Changes:
1. Integration of SFLF into Message Structure Table (MST):
- The ATO plans to introduce local file/master file (LCMSF) schema version 4.0.
- This new schema will integrate the SFLF directly into the MST (being the standardised reporting protocols used when submitting the ALF to the ATO).
- The integration aims to address inconsistencies and gaps in current SFLF reporting.
2. Expanded Questionnaire:
- 52 new questions will be introduced into the MST for CbCREs.
- Some questions may require multiple answers for entities with multiple business lines, offshore reporting lines, or restructures involving different counterparties.
3. Detailed Restructure Reporting:
- The definition of “restructure” has been broadened significantly.
- Taxpayers will need to provide step plans and information on global tax impact, Australian tax impact, and commercial impact for each restructure.
- Additional questions will be required for each step of the restructure and each affiliate counterparty involved.
4. Enhanced Disclosure Requirements:
- Names and places of residence for offshore individuals to whom Australian personnel report.
- Full names of key competitors.
Timeline and Implementation:
- The new format will apply to SFLFs lodged from 1 Jan. 2025.
- LCMSF schema version 4.0 is encouraged for all reporting periods but mandatory for periods starting on or after 1 Jan. 2024.
- LCMSF schema version 3.0 will be deactivated on 1 Jan. 2026.
- The ATO aims to finalise the new schema by 1 Jan. 2025.
Implications for Tax Professionals and Multinationals:
1. Increased Compliance:
- The expanded questionnaire and detailed restructure reporting will require significantly more time and resources to complete.
- Coordination with global group entities will be crucial to obtain the required information.
2. Privacy:
- The requirement to disclose personal details of employees raises privacy issues that need to be carefully managed.
3. Broader Risk Assessment:
- The changes reflect the ATO’s focus on reviewing broader international tax risks, particularly in financing and IP-related arrangements.
- Tax professionals should be prepared for the potential for follow up actions in these areas.
4. Preparation and Planning:
- Given the additional detail requirements, early preparation and planning will be essential, as well as gathering the necessary information well in advance of the reporting deadlines.
5. System and Process Updates:
- Tax departments may need to update their systems and processes to capture and report the additional required information efficiently.
Conclusion:
The proposed changes to the Australian local file reporting represent a significant shift in the ATO’s approach to international tax risk assessment. While these changes aim to provide more structured and detailed information, they also present considerable challenges for CbCREs and their tax advisors. Tax professionals should closely monitor the finalisation of these proposals and begin preparing their clients for the changed reporting obligations. Early engagement with clients, thorough understanding of the new requirements, and proactive planning will be key to ensuring compliance and managing the associated risks effectively.
Next Steps:
Early review of the proposed changes and the impact to your compliance requirements is encouraged.
We note that the ATO has been consulting on these reforms from July to September of this year. Any feedback that was provided by industry and tax professionals may lead to some changes to the current requirements, which should be monitored over the coming months.
