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To be or not to be an SGE for CbC

To be or not to be an SGE for CbC

Tim Keeling, Aaron Yeo and Stefan Lancy discuss draft legislation relating to the definition of a Significant Global Entity.


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On 20 July 2018, Treasury released an exposure draft for consultation which will extend the Significant Global Entity (SGE) definition and, amongst other things, align Australia’s Country-by-Country (CbC) reporting framework with the OECD model requirements. This measure was announced in the Federal Government’s Budget earlier this year and consultation remains open until 17 August. There are two key changes contained in the draft legislation:

  • Introducing the concept of a ‘notional listed company group’ (NLCG) within the SGE definition.
  • Introducing the concept of a ‘country-by-country reporting entity’ (CbCRE) within Australia’s CbC reporting framework.

Notional listed company group

The current SGE definition can exclude from its scope certain entities such as those headed by proprietary companies, trusts, partnerships and investment entities. 

To bring these and other entities into the SGE net, an entity will also be a SGE if it is a member of a NLCG that meets the A$1 billion annual global income threshold. Broadly, an NLCG is defined as a group of entities that would be required to consolidate for accounting purposes as a single group based on the following assumptions:

  • One of the members of the group is a listed company; and
  • Any exception to consolidation (including materiality) is disregarded.

Through this definition, it would appear the Government is seeking to ensure that members of a multinational group with revenues greater than A$1 billion are treated consistently with respect to Australia’s ‘unilateral’ SGE measures, regardless of the manner in which they may (or may not) actually consolidate for accounting purposes. These unilateral measures include the Diverted Profits Tax, Multinational Anti-Avoidance Law, higher administrative and transfer pricing shortfall penalties and General Purpose Financial Statements (GPFS).

Country-by-country reporting entity

The exposure draft also aims to align Australia’s CbC regime to that of the OECD guidance, and as such, an entity could be a SGE but not a CbCRE.

In general, although the exceptions to accounting consolidation will be respected (with the exception of materiality), each entity within the group must now be tested as a global parent entity. We suspect that the exposure draft’s intention is that foreign-owned taxpayers that are part of groups earning revenues greater than A$1 billion that were previously excluded from CbC on the basis that the group was not consolidated for accounting purposes by their controlling shareholders may now face CbC obligations. Further, the legislation as it currently stands may still capture Australian-headquartered taxpayers that have no foreign presence, which arguably goes beyond OECD guidance.

At the other end of the spectrum, foreign owned taxpayers that are not consolidated for materiality purposes may also face CbC obligations in the future.

Given these measures are expected to apply with effect for income years commencing on or after 1 July 2018, it is important that taxpayers are well equipped to deal with any new obligations. The implications for taxpayers may be significant, particularly with respect to aspects such as potential GPFS obligations.

KPMG will provide further observations in due course regarding potential GPFS implications of these new measures but in the meantime, notwithstanding that there may be some refinement to the proposed legislation as a result of the consultation process, it is important that taxpayers understand clearly where they sit with respect to the new NLCG and CbCRE definitions.

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