Company Tax Reform: Transparency

There is demand for greater transparency on if, where and how corporations pay tax. Ben Scull from Thomson Reuters Australia and New Zealand and Christopher Niesche deliver an essential director briefing.

Tax Transparency Code

In late 2017, a range of new corporate tax reports landed in accordance with the Federal Government’s 2016 voluntary Tax Transparency Code (TTC). Among them were BHP, which reported it anticipated paying Australian corporate income tax of US$1.2b ($1.6b) out of US$15b ($19.8b) of payments to suppliers, wages, dividends, taxes and royalties, from a total of US$26.1b ($34.5b) globally. About 120 of Australia’s largest companies have so far adopted the TTC, including Qantas, Woolworths, Telstra, the big four banks, BHP and Rio Tinto. A handful of foreign-owned companies such as ALDI Foods and Unilever Australia have also signed up. Absent are the names most often raised in relation to profit shifting and paying insufficient tax in Australia — the tech giants Apple, Facebook and Google.

Stuart Osborne, a tax partner at Deloitte, notes the companies that have signed represent about 60 per cent of the taxable income and tax payable within Australia’s corporate system. He says well-known companies with a media profile are more likely to sign up.

What companies must do

A Tax Transparency Report (TTR) requires companies to provide a reconciliation of accounting profit to income tax expense; and from income tax expense to income tax paid/payable; and to provide accounting effective company tax rates for Australian and global operations. They should also provide a summary of tax strategy and governance, as well as detailing Australian corporate income tax paid. Finally, they need to “provide a qualitative disclosure of key categories of dealings with offshore related parties which have a material impact on Australian taxable income”. It does not require the disclosure of any information not already known to the ATO.

Frank Cooper AO FAICD, a former tax partner at PwC, who chairs the audit and risk committees at resources companies South 32 and Woodside, says companies should be as transparent as possible to better inform the market and fulfil their responsibilities. “The challenge becomes: how do you achieve that goal of transparency in a way people can understand?”

Public perceptions

One of the spurs to sign up to the code was the ATO decision to publish a Report of entity tax information (total income, taxable income and tax payable) for large corporations from 2013-14 onwards. The numbers can show large discrepancies and raise questions; for instance, why a particular company might have paid a relatively small amount of tax compared with its income. There can be legitimate reasons for this, which can be outlined in the TTR.

“We must be careful about drawing comparisons, and this is probably where companies are starting to exceed the minimum requirements for tax transparency arrangements,” says Cooper. “It’s really about making sure the message is clear.”

Yasmin Allen FAICD, chair of the audit committee at Cochlear, says the ATO’s raw numbers made it look as if the company’s tax rate was too low, so taking part in the code was a chance to provide more detail around its tax position. According to ATO data, Cochlear paid $58m tax on $325m in taxable income in 2015-16 — at first glance far below the corporate tax rate, but not after taking into account the $150m it spends each year on R&D.

Participation

With several boards debating whether to participate, Mitchell warns that if companies don’t, TTR is likely to become mandatory. “If you make this mandatory, it’ll become a tick-the-box exercise, taken to the board with legal and audit reviews. It won’t get the board and executive engagement it’s getting now.” If TTR became mandatory, it would lose its effectiveness, argues Frank Cooper. “Under a voluntary system, there’s more flexibility to tell your story. If you wait for it to be codified, you can end up with something less constructive — and arguably misleading, because when things are codified, they tend to be one size fits all.”