Backdrop – What is BEPS?Base erosion and profit shifting (
BEPS) refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations. Under the inclusive framework, over 100 countries and jurisdictions are collaborating to implement the
BEPS measures and tackle
BEPS. The OECD/G20 BEPS Project, set out 15 Action Plans along three key pillars: introducing coherence in the domestic rules that affect cross-border activities, reinforcing substance requirements in the existing international standards, and improving transparency as well as certainty.
These action plans will equip governments with domestic and international instruments to address tax avoidance, reduce double taxation and ensure that profits are taxed where economic activities generating the profits are performed and where value is created.
Action plan 13 – Transfer Pricing documentation and Country by Country Reporting
With the advent of globalisation, the integration of national economies and markets has increased substantially in recent years, putting a strain on the international tax rules which were designed more than a century ago. In this world of globalisation, companies can do significant tax planning through transfer pricing which may create opportunities for base erosion and profit shifting (BEPS).
The OECD introduced Action Plan 13 to enhance transparency for tax administration among various countries. These rules will provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template and ensure that profits are taxed where economic activities take place and value is created.
The Action Plan 13 has laid down a three-tiered standardised approach to transfer pricing documentation.
I.Country-by-Country Report (CbC)1
Large Multinational enterprises (MNEs) are required to file a Country-by-Country Report that will provide annually and for each tax jurisdiction in which they do business the amount of revenue, profit before income tax and income tax paid and accrued. It also requires MNEs to report their number of employees, stated capital, retained earnings and tangible assets in each tax jurisdiction. Finally, it requires MNEs to identify each entity within the group doing business in a particular tax jurisdiction and to provide an indication of the business activities each entity engages in.
II.Master File (MF)
The guidance on transfer pricing documentation requires multinational enterprises (MNEs) to provide tax administrations with high-level information regarding their global business operations and transfer pricing policies in a “master file” that is to be available to all relevant tax administrations.
III. Local File (LF)
A detailed transactional transfer pricing documentation has to be provided in a “local file” specific to each country, identifying material related party transactions, the amounts involved in those transactions, and the company’s analysis of the transfer pricing determinations they have made with regard to those transactions.
______________________________________________________________________
1 Refer section 286 of Indian Income tax Act, 1961 read with Rule 10DB
Country-by-Country Reports are to be filed in the jurisdiction of tax residence of the ultimate parent entity. These reports can be shared between jurisdictions through automatic exchange of information, pursuant to government-to-government mechanisms such as the multilateral Convention on Mutual Administrative Assistance in Tax Matters, bilateral tax treaties or tax information exchange agreements (TIEAs). The Master file and the Local file have to be filed by MNEs directly to local tax administrations and should be compliant with local MF and LF regulations.
Taken together, these three documents will require taxpayers to articulate consistent transfer pricing positions and will provide tax administrations with useful information. This information will enable the tax authorities to gauge whether companies have used transfer pricing as means for profit shifting into low tax jurisdictions.
Action Plan 13 – India Perspective
On May 5, 2016, India introduced the concepts of Country-by-Country (“CbC”) reporting requirement and the concept of Master File in the Indian Income Tax Act, 1961 (“the Act”) through Finance Act 2016, effective from 1st April 2016. The Central Board of Direct Taxes (“CBDT”) on 31st October 2017 released the final rules on CbC reporting and Master File requirements in India (vide notification no. 92/2017).
I.Country-by-Country Report (CbC)
The Country-by-Country Report requires aggregate tax jurisdiction-wide information relating to the global allocation of the income, the taxes paid, and certain indicators of the location of economic activity among tax jurisdictions in which the MNE group operates. The report also requires a listing of all the Constituent Entities for which financial information is reported, including the tax jurisdiction of incorporation, where different from the tax jurisdiction of residence, as well as the nature of the main business activities carried out by that Constituent Entity. The format of the CbC report (Form No. 3CEAD available on department’s website) is aligned with the BEPS.
MNEs with annual consolidated group revenue equal to or exceeding INR 55,000 million (threshold of EUR 750 million as per OECD) are required to file the CbC. The due date for filing the CbC report in India continues to be the due date for filing the income-tax return i.e. 30 November following the financial year. However, for FY 2016-17, the due date is extended to 31st March 2018 (as per the CBDT Circular 26/2017 released on 25th October 2017).
The Country-by-Country Report will be helpful for high-level transfer pricing risk assessment purposes. It may also be used by tax administrations in evaluating other BEPS related risks and where appropriate for economic and statistical analysis.
CbC Notification – Further, every Indian constituent entity of an MNE headquartered outside India is required to file the CbC report notification in the prescribed format i.e. Form No. 3CEAC (available on department’s website). The CbC report notification is required to be filed atleast two months prior to the due date for filing the CbC report, that is aligned to the due date for filing the income-tax return of the Indian constituent entity. As mentioned above, the due date for filing the CbC report for FY 2016-17 has been extended to 31st March 2018 and accordingly, the due date for the first CbC report notification for FY 2016-17 has also been extended to 31st January 2018. However for subsequent years, the due date of filing the notification will be 30th September.
II.Master file
The Master file is a document which provides an overview of the MNE group business, including the nature of its global business operations, its overall transfer pricing policies, and its global allocation of income and economic activity in order to assist tax administrations in evaluating the presence of significant transfer pricing risk. In general, the master file is intended to provide a high-level overview in order to place the MNE group’s transferpricing practices in their global economic, legal, financial and tax context. The information in the master file provides a “blueprint” of the MNE groupand contains relevant information that can be grouped in five categories:
1.the group’s organisational structure;
2.a description of the group’s business;
3.the group’s intangibles;
4.the intercompany financial activities of the group; and
5.the financial and tax positions of the group.
The CBDT has prescribed that Master File has to be prepared as per the format given in Form 3CEAA (available on department’s website). The form comprises of two Parts i.e. Part A and Part B.
Part A of Master File – Part A comprises of basic information relating to the MNE and the constituent entities of the MNE operating in India (such as name, permanent account number and address). Part A of the Master File will be required to be filed by every constituent entity of an MNE, without applicability of any threshold;
Part B of Master File – Part B comprises of the main Master File information that provides a high level overview of the MNE’s global business operations and transfer pricing policies. Every constituent entity of an MNE that meets the following threshold will be required to file Part B of Master File:
-the consolidated group revenue for the accounting year exceeds INR 5,000 million; and
-for the accounting year, the aggregate value of international transactions exceeds INR 500 million, or aggregate value of intangible property related international transactions exceeds INR 100 million..
The Master File information required to be submitted as per Rule 10 DA of the Income tax Rules, 1962, is largely consistent with BEPS Action 13 requirements. However, few additional data requirements have been incorporated under Rule 10DA of the Income Tax Rules, 1962, requiring MNE to customise their Master File for India. The below table summarises the requirement as per OECD and Indian rules:
The Master File has to be furnished by the due date of filing the income-tax return i.e. 30th November following the financial year. However, for financial year 2016-17 (“FY 2016-17”), the due date is extended to 31st March 2018. MNEs with multiple constituent entities in India can designate one Indian constituent entity to file the Master File in India, provided an intimation to this effect is made in Form No. 3CEAB (available on department’s website), 30 days prior to the due date for filing the Master File in India i.e. March 1, 2018.
III.Local file
In contrast to the master file, which provides a high-level overview of the MNE group, the local file provides detailed pertaining to the intercompany transactions of the local entity. The local file supplements the master file and helps to meet the objective of assuring that the taxpayer has complied with the arm’s length principle in its material transfer pricing positions.
In India, the local file has to be maintained as prescribed under section 92D read with Rule 10 D of the Income Tax Act, 1961. No other specific requirements are prescribed for local file.
Practical Considerations
The CBDT has prescribed detailed rules on CbC reporting and Master File requirements in India however there are various aspects of the rules which will have practical considerations while implementing these rules. The ensuing paragraphs deal with some considerations that may come up while implementing the said rules.
–
Reporting year for CbC report: The requirement to file the CbC report is applicable to an MNE having consolidated group revenue exceeding the prescribed threshold in the immediately preceding financial year. Which means for Indian constituent entities of a foreign MNE where the ultimate parent entity has calendar year end i.e. 31st December, the CbC report is applicable for FY 2016-17 only if the prescribed consolidated group revenue threshold is exceeded for year ended 31st December 2016. In case of Indian constituent entities of an MNE headquartered in India where the ultimate parent entity has financial year end i.e. 31st March, the CbC report is applicable for FY 2016-17 only if the prescribed consolidated group revenue threshold is exceeded for year ended 31st March 2017.
–
Accounting year that should be considered in case of CbC and Master File:The accounting year for CbC would be an annual accounting period, with respect to which the parent entity of the international group prepares its financial statements. However where a foreign MNE appoints an alternate reporting entity resident in India the CbC report would be required to be prepared and filed in India for the accounting year followed by the alternate reporting entity resident in India i.e. the previous year (April to March).
–
Permanent establishment (PE): It is important to note that an Indian permanent establishment (PE) of a foreign MNEwill be said to be a “constituent entity resident in Indiafor the purpose of section 286 and Rule 10DB. Therefore, an Indian PE of a foreign entity should be treated as a constituent entity resident in India.
-Filing of CbC notification on behalf of other Indian Constituent entity: Where an MNE has more than one constituent entity in India, the rules currently do not prescribe to designate one constituent entity to file the CbC notification on behalf of other Indian Constituent entity. Therefore every constituent entity will have to file the CbC notification separately in Form 3CEAC.
–
Filing of Part A of the Master File: Where there are more than one constituent entity in India, the designated entity can file the Part A of the Master File on behalf of its constituent entities.
–
Threshold for filing the Part B of Master File:The Master file will be prepared for the group for the accounting year followed by the parent entity and therefore, the prescribed threshold for applicability of Part B of Master file should be determined based on the accounting year followed by the parent entity of the group. Accordingly, the threshold for determination of the consolidated group revenue and the aggregate value of international transactions ought to be considered using the period followed by the foreign parent as the Master File is being prepared for that period.
Penalties
The below table details the penalties in case of Non Compliance with the CbC and Master File requirements:
