As a measure of safeguard against base erosion and profit shifting (BEPS) by Multinational Enterprises (MNEs) and following the Action Plan 13 of OECD, of which the India is a member country, the amendment was made recently in the Income Tax Act mandating the maintenance and furnishing of Master File and filing of Country-by-Country Report (CbCR).
The draft rules for public discussion relating to the said amendment were notified on 6th October 2017.
Following are some of the key points to be noted:
Master File
Documentation / Maintenance of Master file
Who should maintain details?
Constituent entity of international group should maintain the specified documentations. However, this provision is attracted only when following two conditions are satisfied:
- Consolidated revenue of international group exceeds Rs. 500 crores
AND
- Value of international transaction exceeds Rs. 50 crores OR value of international transactions involving intangible property exceeds Rs. 10 crores.
What has to be maintained in master file?
Certain primary details to be maintained are as follows:
- List of entities of the group,
- Ownership structure,
- Consolidated financial statements of the group
- List of APAs and tax rulings involving the group
Major emphasis is placed on understanding the business of the group and consequently following business-related details are to be maintained:
- Nature of businesses
- Drivers of profits of such businesses
- Supply chain of products / services
- Intra-group service agreements
- Description of services provider in the group
- Transfer pricing policies for intra-group services
- Geographical markets for products and services
- FAR (Functions, Assets and Risk) analysis of major entities
- Description of business restructuring transactions
One of the major concerns of the government is taxing the transaction involving intangible property since the risk of manipulation is high in such transactions involving non-visible but high value assets. Therefore, the draft rules have mandated maintaining detailed information involving intangible properties:
- Strategy for development of intangibles
- Locations of R&D facilities
- Entities carrying out development of intangibles
- Entities having ownership of intangibles
- List of agreements between entities involving intangibles
- Transfer pricing policies adopted by the group regarding R&D and intangibles
- Details of transactions involving transfers of intangibles
The finance related details to be maintained are as follows:
- Description of financing arrangements
- Details of unrelated lenders and related lenders
Furnishing of details maintained in the Master file
When details are to be furnished?
The information referred above has to be furnished on or before 30th November following the financial year. However, for FY 2016-17, due date is 31st March 2018.
Who has to furnish details?
If the constituent entity satisfies the condition for maintenance of the master file, then it has to furnish all the details in the specified form. However, even if the constituent entity does not satisfy the condition for maintenance of master file, it has to furnish the basic details of the master file within the due date mentioned above.
If there are more than one constituent entities in India, the international group has to designate any one entity for this responsibility and notify the income tax authority atleast before 30 days of filing of specified form
Country-by-country report (CbCR)
Applicability
The CbCR has to be furnished by the parent entity of international group or the alternate reporting entity. The alternate reporting entity is any other constituent entity of the group designated for filing of CbCR. In such cases, CbCR has to be filed by such alternate reporting entity.
However, CbCR provisions will not be applicable if consolidated group revenue of preceding financial year does not exceed Rs. 5,500 crores.
Case 1: If parent entity is non-resident in India
If the parent entity of the international group is non-resident, the constituent entity resident in India has to notify whether it is the alternate reporting entity, on or before 1st October every year.
If it is not an alternate reporting entity, then it has to notify the income tax authority about the details of parent or alternate reporting entity and the countries in which they are residents, on or before 1st October every year.
If the constituent entity resident in India is an alternate reporting entity, then it has to file CbCR on or before 30th November succeeding the financial year to which it pertains.
Case 2: If parent entity is resident in India
If the parent entity of the international group is resident, then it has to file CbCR on or before 30th November succeeding the financial year to which it pertains.
However, if the international group has designated the alternate reporting entity, then CbCR in India is to be filed if such alternate reporting entity is also resident in India.
Details to be furnished in CbCR
The tax jurisdiction-wise details are to be furnished for the international group as a whole in the specified form of CbCR. The notified details as per the specified form are as follows:
- Tax jurisdictions – Separate line is also to be included for constituent entities not resident in any tax jurisdiction. If the constituent entity is resident in more than one tax jurisdiction, then reference is made to tax treaty between those jurisdictions and the place of effective management of the entity.
- Revenues from unrelated and related parties – Revenues include all routine income except the dividend received
- Profit before tax – This is to be arrived at after considering extra-ordinary incomes and expenses
- Income Tax actually paid – The income tax paid is to be reported on cash basis on the basis of actual payment in various jurisdictions. However, it will also include the tax deducted at source (TDS) on the income of the entity id such TDS is actually paid by other entities.
- Income Tax accrued – Tax accrued in the financial year is to be reported
- Stated capital of all entities
- Accumulated earnings of all entities
- No. of employees – The liberty is given to select the basis for calculating no. of employees as at the year-end or average employees during the year or any other basis which is followed consistently across tax jurisdictions and from year to year. Full time employees as well as independent contractors may be included in calculation of no. of employees. The liberty is also given for reasonable rounding off and approximation of the no. of employees provided it does not materially distort the distribution of employees across jurisdictions.
- Tangible assets – This should not include cash & cash equivalents and financial assets.
In addition to above details, the tax jurisdiction-wise name of constituent entities and its main business activity is also to be reported.
Also, unlike most of the forms in income tax, the additional space is provided to include any further brief information or explanation that is considered necessary or that would facilitate the understanding of the information provided in the form.
The above-mentioned amendment and the notification, has provided tax authorities with great extent of information which can be analyzed effectively to ensure bona fide tax payment by the MNEs. However, it also adds to the transfer pricing compliance by the MNEs, who will now need to be extra-vigilant while undertaking the international transactions with their Associated Enterprises to avoid any adverse impact.
For deeper discussions on how this issue can affect your business, you can reach us at ersteadvisory@gmail.com
Disclaimer: This article is for the purpose of general awareness and does not represent professional opinion of the author.
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