Union Budget 2016: Sections 92 to 92F of the Act contain provisions relating to transfer pricing regime. Under provision of section 92D, there is requirement for maintenance of prescribed information and document relating to the international transaction and specified domestic transaction.
The OECD report on Action 13 of BEPS Action plan provides for revised standards for transfer pricing documentation and a template for country-by-country reporting of income, earnings, taxes paid and certain measure of economic activity. India has been one of the active members of BEPS initiative and part of international consensus. It is recommended in the BEPS report that the countries should adopt a standardised approach to transfer pricing documentation. A three-tiered structure has been mandated consisting of:-
- a master file containing standardised information relevant for all multinational enterprises (MNE) group members;
- a local file referring specifically to material transactions of the local taxpayer; and
- a country-by-country report containing certain information relating to the global allocation of the MNE’s income and taxes paid together with certain indicators of the location of economic activity within the MNE group.
The report mentions that taken together, these three documents (country-by-country report, master file and local file) will require taxpayers to articulate consistent transfer pricing positions and will provide tax administrations with useful information to assess transfer pricing risks. It will facilitate tax administrations to make determinations about where their resources can most effectively be deployed, and, in the event audits are called for, provide information to commence and target audit enquiries.
The country-by-country report requires multinational enterprises (MNEs) to report 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 total employment, capital, accumulated 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. The Country-by-Country (CbC) report has to be submitted by parent entity of an international group to the prescribed authority in its country of residence. This report is to be based on consolidated financial statement of the group.
The master file is intended to provide an overview of the MNE groups 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 transfer pricing practices in their global economic, legal, financial and tax context. The master file shall contain information which may not be restricted to transaction undertaken by a particular entity situated in particular country. In that aspect, information in master file would be more comprehensive than the existing regular transfer pricing documentation. The master file shall be furnished by each entity to the tax authority of the country in which it operates.
In order to implement the international consensus, it is proposed to provide a specific reporting regime in respect of CbC reporting and also the master file. It is proposed to include essential elements in the Act while remaining aspects can be detailed in rules. The elements relating to CbC reporting requirement and matters related to it proposed to be included through amendment of the Act are:—
1. the reporting provision shall apply in respect of an international group having consolidated revenue above a threshold to be prescribed.
2. the parent entity of an international group, if it is resident in India shall be required to furnish the report in respect of the group to the prescribed authority on or before the due date of furnishing of return of income for the Assessment Year relevant to the Financial Year (previous year) for which the report is being furnished;
3. the parent entity shall be an entity which is required to prepare consolidated financial statement under the applicable laws or would have been required to prepare such a statement, had equity share of any entity of the group been listed on a recognized stock exchange in India;
4. every constituent entity in India, of an international group having parent entity that is not resident in India, shall provide information regarding the country or territory of residence of the parent of the international group to which it belongs. This information shall be furnished to the prescribed authority on or before the prescribed date;
5. the report shall be furnished in prescribed manner and in the prescribed form and would contain aggregate information in respect of revenue, profit & loss before Income-tax, amount of Income-tax paid and accrued, details of capital, accumulated earnings, number of employees, tangible assets other than cash or cash equivalent in respect of each country or territory along with details of each constituent’s residential status, nature and detail of main business activity and any other information as may be prescribed. This shall be based on the template provided in the OECD BEPS report on Action Plan 13;
6. an entity in India belonging to an international group shall be required to furnish CbC report to the prescribed authority if the parent entity of the group is resident ;-
a. in a country with which India does not have an arrangement for exchange of the CbC report; or
b. such country is not exchanging information with India even though there is an agreement; and (c) this fact has been intimated to the entity by the prescribed authority;
7. If there are more than one entities of the same group in India, then the group can nominate (under intimation in writing to the prescribed authority) the entity that shall furnish the report on behalf of the group. This entity would then furnish the report;
8. If an international group, having parent entity which is not resident in India, had designated an alternate entity for filing its report with the tax jurisdiction in which the alternate entity is resident, then the entities of such group operating in India would not be obliged to furnish report if the report can be obtained under the agreement of exchange of such reports by Indian tax authorities;
9. The prescribed authority may call for such document and information from the entity furnishing the report for the purpose of verifying the accuracy as it may specify in notice. The entity shall be required to make submission within thirty days of receipt of notice or further period if extended by the prescribed authority, but extension shall not be beyond 30 days;
10. For non-furnishing of the report by an entity which is obligated to furnish it, a graded penalty structure would apply:-
a. if default is not more than a month, penalty of Rs. 5000/- per day applies;
b. if default is beyond one month, penalty of Rs 15000/- per day for the period exceeding one month applies;
c. for any default that continues even after service of order levying penalty either under (a) or under (b), then the penalty for any continuing default beyond the date of service of order shall be @ Rs 50,000/- per day;
11. In case of timely non-submission of information before prescribed authority when called for, a penalty of Rs5000/- per day applies. Similar to the above, if default continues even after service of penalty order, then penalty of Rs.50,000/- per day applies for default beyond date of service of penalty order;
12. If the entity has provided any inaccurate information in the report and,-
a. the entity knows of the inaccuracy at the time of furnishing the report but does not inform the prescribed authority; or
b. the entity discovers the inaccuracy after the report is furnished and fails to inform the prescribed authority and furnish correct report within a period of fifteen days of such discovery; or
c. the entity furnishes inaccurate information or document in response to notice of the prescribed authority, then penalty of Rs.500,000/- applies;
13. The entity can offer reasonable cause defence for non-levy of penalties mentioned above.
The proposed amendment in the Act in respect of maintenance of master file and furnishing it are: –
a. the entities being constituent of an international group shall, in addition to the information related to the international transactions, also maintain such information and document as is prescribed in the rules. The rules shall thereafter prescribe the information and document as mandated for master file under OECD BEPS Action 13 report;
b. the information and document shall also be furnished to the prescribed authority within such period as may be prescribed and the manner of furnishing may also be provided for in the rules;
c. for non-furnishing of the information and document to the prescribed authority, a penalty of Rs. 5 lakh shall be leviable. However, reasonable cause defence against levy of penalty shall be available to the entity.
As indicated above, the CbC reporting requirement for a reporting year does not apply unless the consolidated revenues of the preceding year of the group, based on consolidated financial statement, exceeds a threshold to be prescribed. The current international consensus is for a threshold of € 750 million equivalent in local currency. This threshold in Indian currency would be equivalent to Rs. 5395 crores (at current rates). Therefore, CbC reporting for an international group having Indian parent, for the previous year 2016-17, shall apply only if the consolidated revenue of the international group in previous year 2015-16 exceeds Rs. 5395 crore (the equivalent would be determinable based on exchange rate as on the last day of previous year 2015-1 6).
The amendments will be effective from 1st April, 2017 and shall apply for the Assessment year 2017-18 and subsequent assessment years.
Clause 47 of Finance Bill 2016
Clause 47 of the Bill seeks to amend section 92D of the Income-tax Act relating to maintenance and keeping of information and document by persons entering into an international transaction or specified domestic transaction.
The proposed amendment seeks to provide that any person, being a constituent entity of an international group, shall also keep and maintain such information and document in respect of an international group as may be prescribed.
Clause 100 of Finance Bill 2016
Clause 100 of the Bill seeks to amend section 271AA of the Income-tax Act relating to penalty for failure to keep and maintain information and document, etc., in respect of certain transactions.
The aforesaid section provides that the Assessing Officer or Commissioner (Appeals) may direct that a person who has failed to keep and maintain any information and document referred to in section 92D, shall pay by way of penalty a sum equal to two per cent. of the value of each international transaction or specified domestic transaction entered into by such person.
It is proposed to amend sub-section (1) of the said section so as to give the reference of section 270A in the said section which is consequential in nature.
It is further proposed to amend the said section so as to provide that if any person being constituent entity of an international group referred to in the proposed new section 286 fails to furnish the information and document in accordance with provisions of section 92D, then, the prescribed authority referred to in the said section may direct that such person shall be liable to pay a penalty of five hundred thousand rupees.
These amendments will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017- 2018 and subsequent years.
Clause 102 of Finance Bill 2016
Clause 102 of the Bill seeks to insert a new section 271GB in the Income-tax Act relating to penalty for failure to furnish report or for furnishing inaccurate report under section 286.
The proposed new section provides that if any reporting entity referred to in section 286 fails to furnish a report referred to in sub-section (2) of the said section then, the prescribed authority may direct such entity to pay by way of penalty a sum of five thousand rupees for every day for which the failure continues if the period of failure does not exceed one month and fifteen thousand rupees for every day for which failure continues beyond the period of one month.
It is further provided that where any reporting entity fails to produce the information and documents within the period allowed under sub-section (6) of section 286, the prescribed authority may direct that such entity shall pay, by way of penalty, a sum of five thousand rupees for every day during which the failure continues, beginning from the day immediately following the day on which
the period for furnishing the information and document expires. It is also provided that if the failures continue after any order directing the person to pay by way of penalty any sum has been served on the entity, then the prescribed authority may direct that such entity shall pay, by way of penalty, a sum of fifty thousand rupees for every day for which such failure continues begining from the date of service of such order.
It is also provided that in case a reporting entity provides inaccurate information in the report furnished in accordance with sub-section (2) of the said section 286 and where the entity knows of the inaccuracy at the time of furnishing the report but does not inform the prescribed authority or the entity discovers the inaccuracy after the report is furnished and fails to inform the prescribed authority and furnish correct report within a period of fifteen days of such discovery or the entity furnishes inaccurate information or document in response to notice under sub-section (6) of section 286 then, the prescribed authority may direct that such person shall pay, by way of penalty, a sum of five lakh rupees.
These amendments will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017- 2018 and subsequent years.
Clause 106 of Finance Bill 2016
Clause 106 of the Bill seeks to amend section 273B of the Income-tax Act relating to penalty not to be imposed in certain cases.
The aforesaid section provides that the penalties referred to in different sections enumerated in the said section 273B shall not be imposable on the person or the assessee for any failure referred to in the said sections, if he proves that there was reasonable cause for the said failure.
It is proposed to amend the said section so as to include the reference of the proposed new section 27 1GB.
This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-2018 and subsequent years.
Clause 110 of Finance Bill 2016
Clause 110 of the Bill seeks to insert a new section 286 in the Income-tax Act relating to furnishing of report in respect of international group.
The proposed section provides for furnishing of a report in respect of an international group, if the parent entity of the group is resident in India.
Sub-section (1) of the proposed new section provides that constituent entity in India of an international group, not having a parent entity resident in India shall notify the prescribed authority regarding the parent entity of the group to which it belongs or an alternate reporting entity which shall furnish the report on behalf of the group in the prescribed manner.
Sub-section (2) of the proposed new section provides that the parent entity of an international group, which is resident in India, shall furnish a report in respect of the international group on or before due date specified under sub-section (1) of section 139 for furnishing of return of income of the relevant accounting year.
Sub-section (3) of the proposed new section provides for the details to be contained in the report to be furnished. It, inter alia, provides that the report shall contain aggregate information in respect of amount of revenues, profit and loss, taxes accrued and paid, number of employees, details of constituent entities and the country or territory in which such entities are resident or located.
Sub-section (4) of the proposed new section provides for furnishing report by entities resident in India and belonging to an international group not headed by Indian resident entity.
Sub-section (5) of the proposed new section provides for circumstances under which the constituent entities referred to in sub-section (4) shall not be required to furnish the report.
Sub-section (6) of the proposed new section provides that the prescribed authority may, by issuance of notice for the purpose of verifying the accuracy of the report furnished by any entity, require submission of information and document as specified in the notice.
Sub-section (7) of the proposed new section provides that the reporting requirement under this section shall not apply to an accounting year, if the total consolidated group revenue for the accounting year preceding it, does not exceed the prescribed threshold.
Sub-section (8) of the proposed new section provides for application of the section in accordance with such guidelines and subject to such conditions as may be prescribed.
Sub-section (9) of the proposed new section, inter alia, defines various terms for the purposes of the new section.
This amendment will take effect from 1st April, 2017 and will, accordingly, apply in relation to the assessment year 2017-2018 and subsequent years.
[Clause 47, 100, 102, 106 & 110]
