What the AASB's new Tax Transparency Code guidance means for business
Tax transparency – where are we at and what do you need to know in light of the new guidance?
Increased scrutiny of corporate tax arrangements over the past few years prompted the federal government, via the Board of Taxation, to introduce a voluntary disclosure regime for Australian corporates called the Tax Transparency Code (TTC).
The TTC disclosures, which are tiered for large and small companies, ask businesses to explain their effective tax rate annually as part of increased corporate transparency.
Many Australian corporate taxpayers, by total tax take, have adopted the voluntary code, which sets out principles of expected disclosure. However, limited guidance has been provided to companies in adopting the specified disclosures.
AASB’s new guidance on the effective tax rate for tax transparency code
The AASB released draft detailed guidance in May 2017 to help businesses meet the TTC recommendation for the suggested tax reconciliation and calculation of the effective tax rate – Part A of the TTC.
The AASB guidance is intended to supplement the TTC core disclosure principles. Critically, it is only in draft form and does not change or expand on the core TTC required disclosures. As it is only a draft release, further amendments may occur on finalisation.
Assisting businesses in meeting the TTC disclosure principles
The AASB guidance, which is contained in a draft appendix to the TTC, promotes consistency and comparability of key information about entities’ tax positions – particularly their effective tax rate (ETR) relative to the corporate tax rate – and aims to help them communicate their tax information.
The guidance sets out the necessary disclosures to ensure interested parties can better understand the differences, if any, between the ETR under the TTC and the accounting ETR prepared in accordance with accounting standards. Further, the draft appendix sets out guidance in relation to the characteristics of useful information that entities should consider when applying the TTC disclosures.
The AASB guidance primarily supplements the Part A disclosures in the TTC around annual effective tax rates that apply to large (>$500 million Australian turnover) and medium (>$100 million Australian turnover) businesses. An outline of the guidance is below:
Reconciliation of profit to tax expense to be paid
- Disaggregate material line items adjusting accounting profit before tax to allow comparison with similar entities;
- Consider the nature and degree of detail to clearly explain the major line items;
- Consider whether the following enhances understandability and comparability:
- Disaggregation of foreign and domestic line item disclosures and/or key balances, and
- Disaggregation of recurring and non-recurring income tax adjustments, and
- Provide comparatives.
Depending on the extent of disclosures an entity may want to make, they should consider separately identifying the following:
- Income taxes paid or payable relating to foreign and domestic entities;
- Accounting profit before tax relating to foreign and domestic entities; and
- Recurring and non-recurring income tax adjustments.
Disclosure of Australian and global effective tax rates
If the TTC ETR differs to the ETR as presented in statutory accounts or ETR using non-GAAP measures, entities should do the following:
- Where the ETR is calculated on different bases, the entity should clearly define the basis adopted;
- Any adjustments made to the accounting ETR to calculate the TTC ETR should be explained and reconciled;
- Any key judgments made in determining accounting profit, Australian operations and the accounting profits attributable to those operations should be clearly disclosed;
- Any changes to the way in which the calculations have been made in the prior years should be clearly disclosed;
- The objective of any ETR, other than the accounting ETR, should be disclosed so that users can understand the difference between the non-accounting ETR and the accounting ETR; and
- Reconcile the TTC ETR and additional ETRs to the accounting ETR, explaining how any adjustments to the accounting ETR are consistent with the objective of the TTC and any additional metrics.
To bring the TTC to life, we’ve included an extract from SEEK Limited’s 2016 annual report which breaks out the effect of foreign tax rates.
Source: SEEK Limited Annual Report 2016, page 59.
SEEK Limited shows the applicable statutory tax rate in each relevant foreign jurisdiction to help readers understand their global effective tax rate. This expands on the single line in the consolidated income tax expense reconciliation being the overseas rate differential line item.
What should companies do?
Any company that has already adopted or is about to adopt the TTC should reassess their current disclosures using the AASB draft guidance when presenting income tax disclosures under the TTC for the 2017 and later tax years.
As the guidance is only in draft form, companies should carefully consider changes to existing public disclosure frameworks. Additionally, companies that are thinking about implementing the TTC disclosures for the first time should take the additional guidance into account when presenting illustrative disclosures to management and audit committees for consideration.
Tax transparency – background
In the past 18 months, taxes paid have attracted global regulatory and media scrutiny.
From the EU decision to claim $14 billion from Apple to Australia’s focus on introducing new multinational anti-avoidance laws to Australian Senate hearings, companies have faced constant scrutiny over their tax affairs.
At the forefront of media attention has been transparency of tax contributions, particularly with the OECD focusing on multinational tax arrangements.
Globally, the starting point has been for companies to report taxes paid by country. With governments worldwide in budget deficit, what was originally simply a regulatory requirement for information has now, with media pressure, become an issue of corporate social responsibility.
The Board of Taxation in Australia has been vocal in calling for corporates to adopt greater transparency in their tax disclosures. The TTC is its way to advocate for such transparency.
John Ratna, partner, PwC
Jonathan Malone, partner, PwC