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Action 13 of the Base Erosion and Profit Shifting (BEPS) Action Plan introduces comprehensive transfer pricing documentation requirements. The standardized approach includes three tiers: Local File, Master File, and Country-by-Country Reporting (CbCR). This action is deemed a minimum standard for exchange of information. 

1. Local File (LF): LF mandates detailed transfer pricing documentation at the transactional level, following each country’s domestic law. It involves substantiating related party transactions or international transactions with associated enterprises through a transfer pricing study report. This file is filed with the local tax administrations. 

2. Master File (MF): MF provides tax administrations with high-level information about Multinational Enterprises’ (MNEs) global business operations and transfer pricing policies. It is available to all relevant tax administrations and offers insights into the overall structure and policies of the MNE. 

3. Country-by-Country Reporting (CbCR):  CbCR requires large MNEs to annually report financial information for each tax jurisdiction they operate in. This includes revenue, profit before income tax, income tax paid and accrued, number of employees, stated capital, retained earnings, and tangible assets. The report also identifies each entity within the group operating in a specific tax jurisdiction. The CbCR is filed in the tax residence jurisdiction of the ultimate parent entity and shared among jurisdictions through automatic exchange of information mechanisms. 

4. Implementation and Thresholds: CbCR requirements were implemented for fiscal years beginning on or after January 1, 2016, for MNEs with annual consolidated group revenue exceeding EUR 750 million. India adopted these documentation requirements from the assessment year 2017-18 (financial year 2016-17) with thresholds set at a group turnover of Rs. 5500 crores or more for CbCR and Rs. 500 crores or more for the Master File. 

Transfer Pricing Documentation – Master File Contents 

The Master File, as part of Action 13 of the BEPS Action Plan, outlines specific information to be included in transfer pricing documentation. The details prescribed in the OECD Transfer Pricing Guidelines (TPG), 2017, are explained below: 

1. Organizational Structure: Chart illustrating the MNE’s legal and ownership structure, including geographical locations. 

2. Description of MNE’s Business(es): 

    • General description of the MNE’s business, including key profit drivers. 
    • Description of the supply chain for the group’s largest products and services. 
    • List and brief description of important service arrangements between group members. 
    • Functional analysis describing value creation contributions by individual entities. 
    • Description of main geographic markets for the group’s products and services. 
    • Brief written analysis of business restructuring, acquisitions, and divestitures. 

3. MNE’s Intangibles: 

    • General strategy for development, ownership, and exploitation of intangibles. 
    • List of important intangibles and their legal ownership within the group. 
    • List of agreements related to intangibles, including cost contribution arrangements and license agreements. 
    • Transfer pricing policies related to R&D and intangibles. 
    • Description of significant transfers of interests in intangibles among associated enterprises. 

4. MNE’s Intercompany Financial Activities: 

    • Description of the group’s financing, including arrangements with unrelated lenders. 
    • Identification of entities providing central financing functions, specifying their country of organization and place of effective management. 
    • General transfer pricing policies related to financing arrangements. 

5. MNE’s Financial and Tax Positions: 

    • Annual consolidated financial statement for the fiscal year concerned. 
    • List and brief description of existing unilateral APAs and other tax rulings related to income allocation among countries. 

Transfer Pricing Documentation – Local File Contents 

The Local File, as part of Action 13 of the BEPS Action Plan, outlines specific information to be included in transfer pricing documentation at the local entity level. The details prescribed in the OECD Transfer Pricing Guidelines (TPG), 2017, are explained below: 

1. Local Entity Information: 

    • Description of the local entity’s management structure, organization chart, and key individuals. 
    • Detailed description of the business and business strategy pursued by the local entity, including involvement in business restructurings or intangibles transfers. 
    • Key competitors. 

2. Controlled Transactions: 

    • Description of each material category of controlled transactions, e.g., procurement of manufacturing services, purchase of goods, provision of services, loans, etc. 
    • Amount of intra-group payments and receipts for each category of controlled transactions, broken down by tax jurisdiction. 
    • Identification of associated enterprises involved in each category, relationship among them, and copies of material intercompany agreements. 
    • Comparability and functional analysis for each documented category of controlled transactions, including transfer pricing methods, tested party selection, assumptions, and multi-year analysis. 
    • List and description of selected comparable uncontrolled transactions, if any, and information on relevant financial indicators for independent enterprises. 
    • Description of comparability adjustments, if performed, and the reasons for concluding that transactions were priced on an arm’s length basis. 
    • Summary of financial information used in applying the transfer pricing methodology. 
    • Copy of existing unilateral and bilateral/multilateral APAs and other tax rulings related to controlled transactions. 

3. Financial Information: 

    • Annual local entity financial accounts for the fiscal year, including audited or unaudited statements. 
    • Information and allocation schedules tying financial data to the annual financial statements. 
    • Summary schedules of relevant financial data for comparables used in the analysis and their sources. 

Country-by-Country Reporting Template and Instructions 

The Country-by-Country Reporting (CbCR) template and instructions, a part of Action 13 of the BEPS Action Plan, aim to standardize the reporting of a multinational enterprise’s (MNE) group allocation of income, taxes, and business activities on a tax jurisdiction-by-tax jurisdiction basis. The template comprises three tables: 

Table 1: Overview of Allocation by Tax Jurisdiction 

    • Information related to the MNE group’s revenues, profit (loss) before income tax, income tax paid (in cash basis), income tax accrued (current year), stated capital, accumulated earnings, number of employees, and tangible assets. 
    • Separate columns for unrelated party and related party transactions. 

Table 2: List of Constituent Entities by Tax Jurisdiction 

    • Details of all constituent entities of the MNE group, including their residence, tax jurisdiction of organization or incorporation, main business activities, and development. 
    • Specific identification of entities involved in holding or managing intellectual property, purchasing or procurement, research, manufacturing, sales, marketing, distribution, administrative management, support services, provision of services to unrelated parties, internal group finance, regulated financial services, insurance, holding shares other than equity instruments, dormant, and other activities. 

Table 3: Additional Information 

    • A section for any further information or explanation deemed necessary to facilitate understanding. 

Template for the Country-by-Country Report – General Instructions

Purpose: This template, as outlined in Annex III to Chapter V of the provided guidelines, serves as a comprehensive reporting tool for multinational enterprises (MNEs). It is designed to document the MNE group’s allocation of income, taxes, and business activities on a tax jurisdiction-by-tax jurisdiction basis. These instructions are an integral part of the model template for the Country-by-Country Report. 


1. Reporting MNE: The Reporting MNE is identified as the ultimate parent entity of an MNE group. 

2. Constituent Entity: For the purpose of completing Annex III, a Constituent Entity includes: 

    • Any separate business unit included in the Consolidated Financial Statements. 
    • Business units excluded from Consolidated Financial Statements based on size or materiality. 
    • Permanent establishments preparing separate financial statements. 

3. Treatment of Branches and Permanent Establishments: 

    • Permanent establishment data should be reported based on the tax jurisdiction where it is located. 
    • Residence tax jurisdiction reporting should exclude financial data related to the permanent establishment. 

4. Consolidated Financial Statements: 

    • These are the financial statements of the MNE group presenting assets, liabilities, income, expenses, and cash flows as those of a single economic entity. 

5. Period Covered by the Annual Template: 

    • The template should cover the fiscal year of the Reporting MNE. 
    • For Constituent Entities, the template should reflect information for their fiscal year ending on the same date or within the 12-month period preceding the fiscal year of the Reporting MNE. 

6. Source of Data: 

    • The Reporting MNE should consistently use the same data sources from year to year. 
    • Data sources may include consolidation reporting packages, separate entity statutory financial statements, regulatory financial statements, or internal management accounts. 
    • Reconciliation to consolidated financial statements is not required. 
    • If statutory financial statements are used, amounts should be translated to the functional currency at the average exchange rate for the year, with a brief description of data sources provided in the template’s Additional Information section. 
    • Any change in data source should be explained, along with its consequences, in the Additional Information section if it occurs. 

7. Template for the Country-by-Country Report – Specific Instructions Overview

This template, detailed in Annex III to Chapter V of the guidelines, provides specific instructions for the allocation of income, taxes, and business activities by tax jurisdiction. Here’s an in-depth summary of the instructions, along with examples: 

Tax Jurisdiction Overview (Table 1):

1. Tax Jurisdiction Listing: 

    • Reporting MNE lists all tax jurisdictions where Constituent Entities are resident for tax purposes. 
    • If a Constituent Entity is resident in multiple jurisdictions, the applicable tax treaty tiebreaker or place of effective management determines the residence. 

Example: If Entity X is resident in both Tax Jurisdiction A and B, the applicable tax treaty or place of effective management decides the reporting jurisdiction. 

2. Revenues: 

Three columns report: 

    • Revenues from associated enterprises. 
    • Revenues from independent parties. 
    • Total revenues. 

Example: Entity Y, resident in Tax Jurisdiction C, reports $10 million from associated enterprises and $5 million from independent parties, resulting in total revenues of $15 million. 

3. Profit (Loss) Before Income Tax: 

    • Reports the sum of profit (loss) before income tax for all Constituent Entities in the relevant tax jurisdiction. 

Example: Entity Z, resident in Tax Jurisdiction D, reports a profit before tax of $2 million. 

4. Income Tax Paid (on Cash Basis): 

    • Reports total income tax paid during the fiscal year by all Constituent Entities in the tax jurisdiction. 

Example: Entity W, resident in Tax Jurisdiction E, pays a total income tax of $500,000 during the fiscal year. 

5. Income Tax Accrued (Current Year): 

    • Reports the sum of the accrued current tax expense recorded on taxable profits or losses for the fiscal year. 

Example: Entity A, resident in Tax Jurisdiction F, records an accrued current tax expense of $1 million for the fiscal year. 

6. Stated Capital: 

    • Reports the sum of stated capital for all Constituent Entities in the relevant tax jurisdiction. 

Example: Entity B, resident in Tax Jurisdiction G, reports a stated capital of $5 million. 

7. Accumulated Earnings: 

    • Reports the sum of total accumulated earnings of all Constituent Entities in the tax jurisdiction at the end of the year. 

Example: Entity C, resident in Tax Jurisdiction H, reports accumulated earnings of $3 million at the end of the fiscal year. 

8. Number of Employees: 

    • Reports the total number of employees on an FTE basis for all Constituent Entities in the relevant tax jurisdiction. 

Example: Entity D, resident in Tax Jurisdiction I, reports 200 employees on an FTE basis. 

9. Tangible Assets (Other than Cash and Cash Equivalents): 

    • Reports the sum of net book values of tangible assets for all Constituent Entities in the relevant tax jurisdiction. 

Example: Entity E, resident in Tax Jurisdiction J, reports tangible assets valued at $20 million. 

List of Constituent Entities (Table 2):

1. Constituent Entities Resident in the Tax Jurisdiction: 

    • Lists all Constituent Entities resident in the relevant tax jurisdiction on a tax jurisdiction-by-tax jurisdiction basis. 

Example: Entity F, resident in Tax Jurisdiction K, is listed alongside Entity G in Tax Jurisdiction K. 

2. Tax Jurisdiction of Organization or Incorporation: 

    • Reports the tax jurisdiction under whose laws a Constituent Entity is organized or incorporated if different from the tax jurisdiction of residence. 

Example: Entity H, resident in Tax Jurisdiction L, is organized under the laws of Tax Jurisdiction M. 

Main Business Activity and TP Documentation Implementation in India 

11.2 India’s Implementation of Master File and CbCR: India incorporated Master File (MF) and Country-by-Country Report (CbCR) requirements for Transfer Pricing (TP) documentation, effective from Assessment Year 2017-18 (Financial Year 2016-17). The corresponding rules outline the guidelines for compliance. 

11.3 Utilization of CbCR and Master File by Tax Authorities: 

11.3.1 Overview of CbCR: CbCR serves as a global financial snapshot of a Multinational Enterprise (MNE) group, offering jurisdiction-wise insights into profit allocation, revenues, employees, assets, taxes paid, stated capital, accumulated earnings, and the main business activities of each Constituent Entity. 

CbCR Information by Jurisdiction: 

  • Revenues: Detailed categorization into related party and third party transactions. 
  • Profit Before Tax (PBT): Reporting of PBT. 
  • Taxes Paid (Cash) and Accrued: Information on both cash taxes paid and accrued taxes. 
  • Stated Capital: Sum of stated capital for each jurisdiction. 
  • Accumulated Earnings: Overview of accumulated earnings. 
  • Tangible Assets: Reporting of tangible assets. 
  • Number of Employees: Information on employees. 
  • Main Business of Each Constituent Entity: Identification of the primary business activities. 

Master File Information: Master File, as per Rule 10DB, offers a comprehensive view of the MNE’s global operations, TP policies, and local business details. It includes: 

  • Organizational Structure: Overview of the MNE’s hierarchy. 
  • Nature of Business: Description of the business’s fundamental nature. 
  • Profit Drivers: Factors influencing profitability. 
  • Supply Chain Details: Insight into the MNE’s supply chain. 
  • Geographical Markets: Overview of the markets served. 
  • Service Arrangements: Description of important service arrangements. 
  • Functional Analysis: Examination of principal contributors’ functions. 
  • TP Policy: Policies for service cost allocation and intra-group services. 
  • Business Restructuring: Details of any business restructuring undertaken. 
  • Intangibles: Comprehensive details on intangibles, including strategy, ownership, agreements, R&D entities, and significant transfers. 
  • Inter-Company Financing: Information on financing arrangements, lenders, central financing entities, and transfer pricing policies. 
  • Consolidated Financial Statement: Presentation of consolidated financial statements. 
  • APAs and Tax Rulings: Details of existing Advance Pricing Agreements (APAs) and other tax rulings. 

Local File Information: The Local File complements CbCR and Master File, focusing on specific details of each Constituent Entity: 

  • Management/Organization Structure: Overview of the entity’s internal structure. 
  • Business Description: Detailed description of the business operations. 
  • Industry Overview: Insight into the industry in which the entity operates. 
  • Inter-Company Transaction Details: Specifics of transactions with related parties. 
  • Economic Analysis: In-depth analysis of the economic aspects of the entity’s operations. 

the Use of Country-by-Country Reports (CbCR) by Tax Authorities 

11.3.2 Use of CbCR by Tax Authorities: 

The Central Board of Direct Taxes (CBDT) issued Instruction No. 2 of 2018, providing guidance on the appropriate use of CbCR data by tax departments. The data is to be utilized solely for risk assessment procedures and cannot be employed to make additions during audits. 

Key Directions: 

  • Risk Assessment Focus: Tax authorities utilize CbCR data to conduct in-depth risk assessments. They delve into various ratios, comparing jurisdiction-wise data on revenues, employees, assets, etc., ensuring that reported profits in India align with the activities conducted in the country. 

Probable Issues Examined: 

1. Information Scrutiny: 

  • Revenues per employee 
  • PBT (Profit Before Tax) per employee 
  • Total Revenues/Tangible Assets 
  • Income Tax Accrued/PBT (Effective Tax Rate – ETR) 
  • Related Party Transactions (RPT)/Revenues 

2. Possible Uses: 

  • Comparison of jurisdictional revenues/PBTs per employee ratios 
  • Profits and/or revenues per unit of tangible assets 
  • Identifying ETR per jurisdiction for comparison of Maximum Marginal Rate (MMR) for each jurisdiction 
  • Identifying the proportion of RPT revenues to total revenues 

3. Possible Assertions: 

  • Low substantial activities in proportion to revenues/profits may indicate a Base Erosion and Profit Shifting (BEPS) risk. 
  • Evaluating whether profits are being shifted to low-tax jurisdictions. 
  • Higher RPT/Total revenue ratio may suggest a higher possibility of BEPS risk. 

4. Comparison with Other Group Data: Tax authorities may compare taxpayer data with that of other groups, potentially drawing adverse inferences. However, using another competitor’s data without the taxpayer’s consent could be legally unacceptable. 

5. Adverse Ratios to be Scrutinized: 

  • High third-party revenue but low PBT and low ETR (compared to MMR). 
  • High related party revenue but low PBT. 
  • High tax accrued but low tax payments, possibly using government schemes to defer tax outflow. 

6. BEPS Risk Considerations/Flags: 

  • Entity with no tax residence and significant related party transactions. 
  • Entity with dual tax residence and significant related party transactions. 
  • Low/high profits with mostly mobile activities. 
  • Significant related party transactions with holding company having no substantial activities. 
  • Significant related party transactions with an entity having high PBT and low ETR. 

7. Recommendations for Taxpayers: Taxpayers are strongly advised to maintain robust documentation justifying factual and commercial rationale. 

the Use of Master File Information by Tax Authorities 

11.3.3 Utilization of Master File (MF) Information: 

The Master File (MF) offers a holistic view of a Multinational Enterprise (MNE) group, encompassing organizational structure, nature of business, and transfer pricing (TP) policies related to intra-group service arrangements, intangibles, and inter-company financing. Tax authorities can leverage MF information in conjunction with Country-by-Country Report (CbCR) details for high-level tax risk assessments. 

Key Areas of Utilization: 

1. Evaluation of Top Contributors: 

  • Tax authorities assess entities contributing more than 10% of revenue/profits/assets to scrutinize the functional profiles of top contributors. 
  • Comparison with the Local File (LF) ensures alignment with the MNE group’s macro-level supply chain, verifying if profits in India match the level of activity. 

2. Intra-Group Service Arrangements: 

  • Detailed data from CbCR and MF enhances tax authorities’ scrutiny of intra-group service centers. 
  • Specific questions may arise concerning important service arrangements, determining if services are shareholder activities or would have been availed at a price from a third party. 

3. Business Restructuring and Acquisitions: 

  • Mandatory disclosure of significant business restructuring, acquisitions, and divestments in the MF aids Indian tax authorities. 
  • Transactions involving Indian taxpayers reported in the MF are required to be disclosed in Form 3CEB as international transactions, ensuring compliance with Indian tax regulations. 

4. Intangibles and DEMPE Functions: 

  • Actions 8-10 guidelines incorporated in OECD TPG 2017 emphasize delineation of intangible transactions. 
  • Indian MF regulations mandate listing entities engaged in intangible development and management, allowing authorities to evaluate the role of Indian entities in DEMPE functions. 
  • Scrutiny includes assessing whether Indian entities are appropriately compensated based on their contributions to DEMPE functions. 

5. Contract R&D Service Providers: 

  • CBDT Circular 312 in 2013 outlines criteria for contract R&D service providers with insignificant risks. 
  • Evaluation considers factors like the foreign principal’s control, supervision, funding, and ownership rights on the outcome of R&D. 

6. Inter-Company Financial Activities: 

  • Centralized financing arrangements, including intra-group loans, cash pooling, and guarantees, come under increased scrutiny. 
  • Benchmarking difficulties in unique intra-group financial transactions may lead to detailed and specific questions from tax authorities. 
  • OECD’s discussion draft on financial transactions and Indian provisions under section 94B address issues related to interest deductions and interest limitation. 


Actions 8-10 and OECD TPG 2017: 

  • OECD TPG 2017 incorporates Actions 8-10, emphasizing the delineation of intangible transactions through Development, Enhancement, Maintenance, Protection, and Exploitation (DEMPE) functions. 
  • Legal ownership alone doesn’t entitle returns; all contributing entities in DEMPE functions should receive appropriate returns. 
  • Indian MF regulations require disclosing entities engaged in intangible development and management, ensuring alignment with DEMPE functions. 

Tax Authorities’ Scrutiny and Compensation: 

  • Tax authorities analyze transactions, ensuring proper compensation to Indian entities for their contribution to DEMPE functions. 
  • Compensation models like cost-plus may face rejection; profit split methods based on DEMPE functions may be applied for fair attribution of profit. 

CBDT Circular 312 (2013) for Contract R&D Service Providers: 

  • Circular 312 outlines criteria for foreign principal control, supervision, and assumption of significant risks in contract R&D service. 
  • Emphasis on foreign principal’s strategic decision-making, funding, and supervision; India’s lack of ownership rights on R&D outcomes. 
  • CBDT’s approach aligns with OECD principles and requires MNEs to revisit TP policies for intangibles. 

Inter-company Financial Activities: 

Centralized Financing Arrangements: 

  • MNEs use centralized financing for cash and corporate management, involving intra-group loans, cash pooling, guarantees, and issuance of instruments. 
  • Benchmarking peculiar intra-group arrangements poses challenges, leading to increased litigation. 

OECD Discussion Draft on Financial Transactions (July 2018): 

  • Addressing issues like placing high levels of third-party debt in high-tax countries, generating excessive interest deductions, and funding tax-exempt income. 
  • Recommends a fixed-ratio rule limiting interest deduction to a percentage of Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). 

Indian Response – Section 94B under the Income Tax Act, 1961: 

  • Section 94B introduces interest limitation provisions in alignment with OECD recommendations. 
  • Entities treated as “cash boxes” without critical functions receive a simple “risk-free return.” 

Overall Considerations: 

  • OECD’s approach in Actions 8-10 and financial transactions aligns with principles reflected in Indian tax law. 
  • Continuous alignment of TP policies with OECD guidelines is crucial for MNEs to ensure compliance and minimize tax risks. 

Way Forward: 

Challenges for MNEs: 

  • Tax authorities across jurisdictions can now access critical information about MNE groups, making internal comparables more stringent. 
  • MNEs face the challenge of preparing for detailed scrutiny by ensuring consistency, transparency, and objectivity in their tax compliance. 

Results so far (as of October 2022): 

  • 58 jurisdictions allowed filing CbC reports for 2016, with over 100 jurisdictions having domestic laws mandating CbC reporting. 
  • Over 3,300 relationships established for the exchange of CbC reports between tax jurisdictions. 
  • First exchange of CbC reports occurred in 2018, and tax administrations, with OECD support, are analyzing tax risk assessments and assurance processes. 

Aggregated Data and Reports: 

  • Second set of aggregated and anonymized data from CbCR released in July 2021, covering nearly 6,000 MNE groups headquartered in 37 jurisdictions and operating globally. 
  • Information included in Corporate Tax Statistics – third edition, offering insights into global tax and economic activities. 

Fifth Annual Peer Review Report on CbCR (October 2022): 

  • OECD published the compilation of reports on the Fifth Annual Peer Review on CbCR for Action 13 of BEPS. 
  • Covers 134 jurisdictions, indicating that CbCR implementation is largely consistent with Action 13. 
  • 28 jurisdictions recommended to establish or improve domestic, legal, or administrative frameworks. 
  • Updated guidance on CbCR implementation released on topics like the use of positive and negative figures, reporting Permanent Establishment information, and treatment of certain accounting periods. 

CBDT Notification (April 2021): 

  • CBDT amended the threshold for CbCR applicability, increasing consolidated group revenue to INR 6,400 crore from INR 5,500 crore. 
  • Simplified filing procedures by introducing the term “constituent entities of an international group required to file the information and document.” 

Compilation of 2023 Peer Review Reports (September 2023): 

  • OECD published the compilation of 2023 Peer Review Reports, reflecting ongoing evaluations of CbCR implementation. 

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April 2024