In order to bring in transparency and increase in sharing of information between tax authorities in different countries, OECD (The Organisation for Economic Co-operation and Development) in its Action 13 of the BEPS (Base Erosion and Profit Shifting) guidelines had brought in Country by Country reporting (CbCr).
What is CbCr?
It was proposed in Finance Act 2016. It is a part of three-tiered transfer pricing documentation structure which must be maintained and produced before the income-tax authorities along with a master file (contains standardized information relevant for all Multinational enterprise group members) and a local file (refers specifically to material transactions of the local taxpayer).
The BEPS Action 13 report provides a template for MNEs to report annually and to provide for each tax jurisdiction, in which they do business, the information mentioned therein. This report is called the Country-by-Country (CbC) Report. This report encompasses the key elements of the financial statements which is useful to the tax jurisdiction. MNEs have to report it with the tax jurisdiction in which the MNE group does its business.
What does CbCr entails?
- Information such as Capital, retained earnings, tangible assets not being cash or cash equivalents, revenue, income, taxes paid, accrued and other indicators of economic activities are included in this report
- This report shall also include the nature and details of the main business activity or activities of each constituent entity along with any other information as may be prescribed
The Penalty for not furnishing the information and documentation is set to INR 5,000 per day for a month and thereafter it will increase to INR 15,000 per day. If the CbC report is not filed even after the service of notice then the amount can increase up to INR 50,000 per day from the date of service of notice. In case any inaccurate information is furnished or the corrected report is not filed within 15 days, penalty of INR 5,00,000 will be levied.
Honestly speaking, CbC Reporting is a tough task as the MNEs falling within the threshold limit must fill in a detailed template in which they have to report information such as their amount of revenue earned from the related as well as unrelated parties along with whatever their profits are, and the taxes paid and accrued.
Applicability of CbCr
Applicability of CbCr is revenue specific as it is only applicable to MNE groups with an annual consolidated group revenue of €750 million or more in the preceding accounting year. The India specific threshold is INR 5,500 Crores. This view is in line with section IV (1) of the OECD Guidance on Implementation of CbCr. The consolidated group revenue of the accounting year preceding the reporting accounting year will be considered in order to check the applicability of CbCr.
Implementation of CbCr completely depends on when the countries intend to implement it in their own legal system. Earlier, starting with the first financial year commencing on 1 January 2016, CbCr were required to be filed within 12 months from the end of the fiscal year.
Budget 2018 Impact on CbC Reporting
In the Budget 2018, the following amendments were made in CbCr with a view to improve the effectiveness and reduce the compliance burden of such reporting:
- The time allowed to the parent entity or Alternate Reporting Entity (ARE), which is resident in India, for furnishing the CbCr is now proposed to be extended to twelve months from the end of reporting accounting yeare. the accounting year in respect of which the financial and operational results are required to be reflected in the report.
- The Constituent entity of a MNE group, which is resident in India, having a non-resident parent, shall also furnish CbCr in case its parent entity outside India has no obligation to file the CbCr report in the latter’s country or territory;
- The time allowed for furnishing the CbCr, in the case of constituent entity resident in India, having a non-resident parent, shall be twelve months from the end of reporting accounting year
- The due date for furnishing of CbCr by the ARE of an international group whose parent entity is outside India will be the due date specified by that country or territory. ARE must furnish the CbCr with the tax authority of the country or territory of which it is resident,
- The abovementioned amendments would apply retrospectively with effect from 1st April 2017 (A.Y 2017-18)
“Where the Country-by-Country Report (CbCr) must be filed?”
CbCr are generally to be filed where the headquarter of the parent company exists. However, if the country where the headquarter of the parent company exists has not implemented CbCr, MNEs should file CbCr in the country where their most significant activities occur and where CbCr is implemented. This is to be made available to tax authorities in all jurisdictions in which the MNE operates.
CbCr will give tax administrations a global picture of the operations of MNE Groups. CbCr might be a tough task, but it can provide the tax authorities information to perform high-level transfer pricing risk assessments and to evaluate other BEPS-related risks. Therefore, MNE Groups should now adopt a consistent and harmonized approach for preparing their master file and local files as well as CbC reporting and be prepared for a more detailed information or document requests during an audit.
(Authored by – Chetan Sharma, Asst. Manager, Direct Tax at International Business Advisors)
