Significant changes to CbC reporting and other international tax considerations in 2025

The ATO has announced changes to disclosure requirements and reporting obligations with particular focus on high-risk transactions (intercompany financing and intangibles) plus expanded definitions of business restructures which will significantly increase the compliance burden for large multinational enterprises with Australian tax reporting obligations.

Please see below a summary of the most relevant developments.

1. New local file short form requirements
2. Change to exemptions framework for Country-by-Country (CbC) reporting (severely limiting exemptions, and removing exemptions to lodging a local file in the absence of international related party dealings)
3. Public country by country reporting due from 30 June 2026
4. Pillar 2 obligations start to arise
5. Revised thin capitalisation rules
6. Debt deduction creation rules
7. Transfer pricing analysis required to support the quantum of debt
8. Amendments to Reportable Tax Position disclosures

As these are complex and extensive, our transfer pricing / CbC reporting and international tax specialists would be very happy to arrange a call to discuss further.

Local File – New Short Form

The new Short Form Local File (SFLF) requirements are quite extensive and apply for any reporting periods starting on or after 1 January 2024. In addition, CbC reporting entities (CbCREs) will be required to use the new Local File/Master File (LCMSF) schema version 4.0., in order to submit their Australian Local File (including the Short Form Local File), CbC Report and Master File.

The full list of differences between the old SFLF disclosures and the new ones can be viewed on the ATO’s website. However, to summarise, the ATO is requiring CbC reporting entities to disclose in greater detail the qualitative information regarding the entity’s business lines/functions, business strategies, employee reporting lines, specific employee role information, business restructures and usage of intangibles. Business restructures include (new and amended) financing arrangements greater than A$ 10 million, a list of six Deemed Significant Restructures (regardless of materiality) and require taxpayers to attach step plans and details of connected steps.

This is likely to result in more time and resources being spent on preparing the SFLF, particularly in the first year and all subsequent years where disclosures on the restructure question are required. Where we can roll-forward information from the prior year we will do so, however, we will require additional information (including information likely only available to Group Tax).

Change to exemptions framework

From 1 January 2025, a new exemptions framework will apply to CbC reporting which will particularly impact:

• Companies which previously enjoyed Fast Track Exemption 7 (answering No to Question 26 of the Company Income Tax Return to disclose that it did not enter into any international related party dealings (IRPDs); and
• Trusts which did not engage in any IRPDs and utilised Fast Track Exemption 7 to request the Commissioner’s discretion for an exemption to lodge an Australian Local File.

The ATO has announced that with respect to reporting periods starting on or after 1 January 2024, there is generally no administrative relief available for the Local File. There are also no Fast Track exemptions available for the Master File and it is expected that in most cases the ATO expects that a Master File will be lodged.

Historically, dormant companies which notified the ATO that a return was not necessary, obtained administrative relief from CbC reporting statements, including not needing to lodge an Australian Local File. The ATO has announced that with respect to reporting periods starting on or after 1 January 2024, there is generally no administrative relief available for the Local File. In our experience, we have noted that the ATO is no longer accepting the absence of IRPDs as a sufficient basis for an exemption request. The updated exemptions framework has also removed the Dormant company guidance and this will no longer be available as the basis for not preparing and lodging an Australian Local File for income years commencing from 1 January 2024.

Given these changes, it will likely be necessary for all taxpayers with CbC reporting obligations to prepare and lodge an Australian Local File (and consider other CbC reporting obligations).  The Australian Local File consists of a Short Form Local File, Part A and Part B.  Where the taxpayer does not engage in any IRPDs, a Short Form only Local File is required.

Public Country-by-Country Report

Public Country-by-Country (Public CbC) requires certain large multinational enterprises to lodge and publish an additional CbC statement known as a Public CbC report with the ATO. For reporting periods commencing on or after 1 July 2024, Public CbC reporting Ultimate Parent Entities (UPE’s) need to report certain tax information on a country-by-country basis, to the ATO. The due date for Public CbC reports will be one year after the reporting period ends. The first lodgements will be due in respect of income years ended 30 June 2025, due by 30 June 2026.

The Public CbC report discloses selected tax information such as the revenues, profits and income taxes of the global group; the activities of the global group; and an entity’s international related party dealings. This is published on data.gov.au and is due for lodgement 12 months after the end of the relevant reporting period.

An entity is only required to lodge and publish a Public CbC report if all of the following apply:

• It is a for the preceding period
• It is an entity of a specific type (i.e., a constitutional corporation – or a trust/partnership where each of the trustees/partners is a constitutional corporation)
• It satisfies the requirements for that reporting period.

An entity is said to have satisfied the requirements for that reporting period if all of the following apply:

• They were a Public CBC reporting parent for a period that includes the whole or a part of the preceding reporting period
• They were a member of a Public CBC reporting group at any time during the reporting period
• At any point during the reporting period, they, or a member of their Public CBC reporting group, were an Australian resident or a foreign resident operating an Australian permanent establishment
• A$10 million or more of their aggregated turnover for the reporting period was Australian-sourced
• They were not an exempt entity or included in a class of exempt entities.

Please note that the ATO has informed that the lodgement form and instructions will be made available during 2025. The ATO website has more information on the type of disclosures this form will require (www.ato.gov.au/publiccountrybycountryreporting).

It is important that head offices are aware of this pending obligation.

Pillar 2 obligations

The Government announced in the 2023 Federal Budget that it will implement a global minimum tax and a domestic minimum tax based on the OECD Global Anti-Base Erosion (GloBE) Model Rules (Pillar 2). Legislation has now been passed and the rules begin 1 January 2024.

At a high-level, the rules will apply to large multinationals with annual global revenue of A$ 1.2 billion or more. The rules:

1. are highly complex and are intended to ensure a minimum effective tax rate in each jurisdiction of 15% determined by specific calculations.
2. Will introduce significant compliance obligations and additional calculations.
3. Introduce new mechanisms that ensure the minimum global tax rate is achieved by paying / remitting ‘top-up’ tax where necessary.

We strongly recommend modelling the impact of the draft rules to the Company and whether the Company will be eligible for the simplified compliance options (namely the safe harbours available).

Thin Capitalisation rules

The thin capitalisation provisions are designed to limit the amount of debt deductions on cross-border investments which have been designed to obtain a more favourable tax treatment in Australia. In other words, it ensures certain entities do not reduce their tax liabilities by using an excessive amount of debt capital to finance their Australian operations.

There are provisions which exclude certain entities from the regime. One in particular is where the total Australian interest expense of the entity and its associates is less than A$2 million for the income year.

The new thin capitalisation rules apply to tax assessments for income years commencing on or after 1 July 2023, while the debt deduction creation rules will apply to assessments for income years starting from 1 July 2024. In short, the new rules operate to deny debt deductions by reference to earnings, whereas the former rules applied based on a balance sheet approach. The above threshold will continue to apply.

If the client is a general class investor (an Australian entity that controls a foreign entity or carries on business at or through an overseas permanent establishment, an Australian entity that is controlled by a foreign entity or entities, a foreign entity that carries on business in Australia), it will be subject to one of 3 new tests:

• Fixed ratio test – which limits net debt deductions to 30% of earnings before interest, taxes, depreciation, and amortisation (EBITDA) measured on a tax basis. Denied deductions can be carried forward for 15 years and utlised in the future, subject to satisfaction of recoupment tests. Thus the obligation rests on the taxpayer to prove that the quantum of debt “is a relevant condition for the purpose of considering the commercial or financial relations that operate between the respective parties and is not disallowed.”
• Group ratio test – based on the proportion of group net third party interest expense to group EBITDA.
• Third-party debt test – which replaces the arm’s length debt test and limits debt deductions other than those relating to third party debt interests that meet certain conditions. We note that the policy intention for the third party debt test is that it was to capture a narrow net of third party debt arrangements. Accordingly, any taxpayer seeking to apply this test will need to review their loan agreements to ensure that they satisfy the narrow criteria.

Debt deduction creation rules (DDCR)

As part of the overhaul of the thin capitalisation provisions, new debt deduction creation rules (DDCR) were introduced to income years on or after 1 July 2024. These rules apply in priority to the thin capitalisation provisions and address the risk of a taxpayer having excessive debt deductions in connection with the acquisition of a capital gains tax asset or other legal or equitable obligation from, or a prescribed payment to, an associate. Where the rules apply, debt deductions are permanently denied to the extent they are used to fund such acquisitions / payments.

In light of the above, it will be important to trace the use of related party debt going forward.

The ATO has also issued Draft Practical Compliance Guideline PCG 2024/D3, which outlines the ATO’s compliance approach to restructures carried out in response to the new DDCR and the Tax Act. This includes a new risk assessment framework.

Importantly, onshore and cross-border related party arrangements can trigger the DDCR.

Privately owned groups should closely consider whether their arrangements, including wholly domestic arrangements, may be affected by the DDCR.

The DDCR disallows debt deductions arising in relation to certain related party arrangements, including arrangements undertaken (entirely or partially) prior to 1 July 2024.

The DDCR does not apply to:

• entities that, together with their associate entities, have A$2 million or less of debt deductions for an income year
• authorised deposit-taking institutions (ADIs)
• securitisation vehicles
• certain special purpose entities.

The DDCR applies to domestic transactions and debt deductions created by historical transactions.

This information and more details are available in the following website: https://www.ato.gov.au/businesses-and-organisations/corporate-tax-measures-and-assurance/debt-deduction-creation-rules-and-division-7a 

Transfer pricing analysis for debt quantum

Prior to the introduction of “Treasury Laws Amendment (Making Multinationals Pay Their Fair Share—Integrity and Transparency) Act 2024 (Cth) (the Treasury Laws Amendment 2024)” (New Thin Capitalisation Rules)  the rules as prescribed in section 815-140 of the ITAA 1997 sort to defer the question of an arm’s length quantum of debt to the provisions as outlined in the Thin Capitalisation regime provisions in Division 820, such that the Thin Capitalisation provisions sort to set the maximum amount of debt a taxpayer would be reasonably expected to have.

However, under the New Thin Capitalisation Rules section 815-140 has been amended such that it no longer applies to applies to general class investors. The rationale behind this is that given the thin capitalisation regime has shifted from an asset-based test to an earnings based test, the amount of debt an entity has “is a relevant condition for the purpose of considering the commercial or financial relations that operate between the respective parties and is not disallowed. Consequential amendments are made to ensure this outcome.”¹ Therefore when applying the fixed ratio test the taxpayer will also be required to consider whether the quantum of debt is an arm’s length condition, requiring a transfer pricing analysis to be performed.

Changes to Reportable Tax Position (RTP) Schedule

The RTP is intended to disclose high-risk tax positions to the ATO as part of the income tax return.  Taxpayers are required to complete the schedule if they lodge a company tax return for the entire year (12 months or more); have total business income of either $250 million or more in the current year OR A$25 million or more in the current year and is part of an economic group with total business income of A$250 million or more in the current year. An economic group includes all entities (companies, trusts and partnerships, etc) that lodge an Australian tax return under a direct or indirect Australian or foreign ultimate holding company or other majority controlling interest. This includes all entities under a single ultimate holding company or under the ownership of a single individual, trust or partnership.

The RTP schedule requires disclosure of all RTPs across three categories:

• Category A – uncertain tax positions: a position that is about as likely to be correct as incorrect, or less likely to be correct than incorrect. Where transfer pricing positions are not documented according to Australian documentation requirements, they may need to be disclosed. If the tax impact of a transfer pricing position exceeds A$3 million, we recommend reviewing the transfer pricing documentation in place.
• Category B – uncertain positions in the financial statements: a position in respect of which uncertainty about taxes payable or recoverable is recognised and/or disclosed in the taxpayer’s financial statements or a related party’s financial statements. This can include transfer pricing positions which any other group company has disclosed in their financial statements. Group finance may need to provide information on the provisions in the financial statements to determine disclosures requirements.
• Category C: a reportable arrangement based on a series of questions raised. There is no materiality threshold for Category C disclosures. Any transfer pricing arrangements caught by Category C need to be analysed / risk ratings disclosed regardless of materiality. Changes are intended to be made to Category C questions that align to the new Short Form and we recommend reviewing RTP disclosures and preparing the Local File at the same time.

Category A and B RTPs that are not material do not need to be disclosed. The RTP schedule is expected to reflect additional questions regarding new guidance issued in 2024 and 2025 particularly related to intangibles, debt arrangements and restructures.  We will provide you with more information once the forms and instructions for 2025 are available