Australia raises pressure on multinationals with strict tax disclosure law

Unlock the Editor’s Digest for free

Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

Australia has approved one of the world’s strictest tax disclosure laws for multinational companies, forcing them to reveal details of their finances in dozens of jurisdictions, while also achieving a breakthrough in passing legislation to reform its central bank.

The tax and central bank reforms were passed by Australia’s upper house after a dramatic day in Canberra that culminated in Labor and the minority Green parties striking a deal to push through several new laws.

The tax law passed by the senate late on Thursday will require companies to report revenues and profits in 41 countries and financial centres that “are typically associated with tax incentives, tax secrecy and other matters likely to facilitate profit shifting activities”, according to Australia’s Treasury.

The list includes Hong Kong, Singapore, Switzerland, Jersey, Guernsey and several countries in the Caribbean.

The disclosures will be published by the government, opening up hundreds of companies to greater scrutiny. The law applies to companies with more than A$1bn ($US650mn) in annual revenues, including at least A$10mn from Australia.

Tax experts said the new law’s reporting requirements would set a precedent for other governments to pass legislation to improve financial transparency.

Lyn Morgain, chief executive at Oxfam Australia, described the legislation as “world leading”.

“It’s not just Australia that will benefit,” said Morgain. “Many multinational corporations that operate in Australia also operate in many other countries across the world. Australia’s transparency will have ripple effects that benefit low-income countries who desperately need the tax revenue for basic services.”

The plan to establish a separate monetary policy board within the Reserve Bank of Australia to decide interest rates had appeared doomed to failure in September, after the main opposition parties said they would vote against the once-in-a-generation reforms.

The Greens reversed that decision on Thursday during negotiations with Anthony Albanese’s Labor party. The deal, which occurred on the last sitting week of the Australian parliament this year, could be the last act of this parliament if an early election is called.

The tax law is part of a long-running effort to crack down on profit shifting — where multinational companies move their profits to low-tax countries to reduce their tax burden — by compelling companies to reveal how much revenue they book in low-tax jurisdictions.

“Australia is pushing the envelope further than anyone else,” said Jason Ward, principal analyst at the Centre for International Corporate Accountability and Research.

However, the parliament backed away from requiring companies to report revenue on a fully global basis after some business groups argued that it would put too great a compliance burden on smaller companies.

The OECD also intervened last year on the basis that some of the original proposals might have undermined its own country-by-country programme, in which confidential reports are shared with tax authorities around the world. 

The law also excludes low-tax territories covered by other international directives — including Cyprus, Ireland, Luxembourg and the Netherlands. Australia’s Treasury said many multinationals would be subject to tax disclosures for EU countries under the bloc’s “public country-by-country” reporting regime. 

The EU Tax Observatory, a research institution funded by the EU, said the omissions — along with other jurisdictions such as the UK and Puerto Rico not covered by any international directives — were “blind spots”. However, it said the law was far more “comprehensive” than one adopted by the EU and represented a “crucial step towards combating tax avoidance and enhancing transparency”.

Alex Cobham, chief executive of the Tax Justice Network, said the “glass is definitely half full”.

Australia “wanted to have the best standard in the world and they will have that,” he said. “The worse thing is that they, under pressure, backed away from requiring it for every country.

The EU Tax Observatory estimated that the Australian law would affect almost 900 US companies operating in Australia, as well as 180 Japanese companies, 161 Chinese and 111 French.

Successive Australian governments have battled for more than a decade to tackle multinational tax avoidance by increasing reporting requirements.

Companies including miner BHP and conglomerate Wesfarmers have opted to publish detailed regional information, but many others continue to use offshore structures to reduce their tax burden in the country, according to tax research groups.

The new law is broadly based on a tax standard developed by the Global Reporting Initiative, an independent international body, aimed at encouraging companies to make public disclosures of their activities, revenues, profit and tax paid in each country in which they operate. 

The Australian law also requires disclosure of granular revenue information — such as third-party sales and intragroup transactions — and rejected a “safeguard clause” in the EU rules that allows a five-year delay in the publication of the data.

Australian tax authorities will only consider exemptions where the data is deemed to have national security implications, or its disclosure could reveal commercially sensitive information or a violate a law.