CBCR: Why Such Reporting, By Whom, When, What Are the Difficulties and Benefits

CbCR (Country by Country Report) has created a lot of hue and cry in the industry, hence here in this article the author will provide the basic concepts related to CbC reporting for all the Chartered Accountants. Tax Professionals who are looking for advanced knowledge may refer another article written by the same author on “CbCR – An Advanced Analysis”.

India entered into Double Tax Avoidance Agreement (DTAA) with various countries with the aim to ensure that none of the taxpayers are harassed because of double taxation in both the countries (one where the income is earned and other where he is resident). However later on all the countries realized that these DTAA’s are used by various entities for tax evasion and avoidance by various means, one of which is by shifting profits to a lower tax jurisdiction.

OECD along with G20 nations decided to fight against such harmful Tax practices, for this purpose they came up with BEPS (Base Erosion Profit Shifting) project in which 15 Action Plans were to be delivered. Purpose of BEPS is to prevent Tax Avoidance strategies of Multinational Enterprises (MNEs) such as double non-taxation, and shifting of profits to lower tax jurisdiction.

Objectives of transfer pricing documentation requirements are:-

• to ensure that taxpayers give appropriate consideration to transfer pricing requirements in establishing prices and other conditions for transactions between associated enterprises and in reporting the income derived from such transactions in their tax returns;
• to provide tax administrations with the information necessary to conduct an informed transfer pricing risk assessment; and
• to provide tax administrations with useful information to employ in conducting an appropriately thorough audit of the transfer pricing practices of entities subject to tax in their jurisdiction, although it may be necessary to supplement the documentation with additional information as the audit progresses.

Action Plan 13 of BEPS project is related to “TRANSFER PRICING DOCUMENTATION AND COUNTRY-BY-COUNTRY REPORTING”. Under this action plan, OECD has asked for three-tiered documentation to be maintained by MNEs namely:-

1. A Master File;
2. A Local File; and
3. A Country by Country Report (CbCR)

To align with OECD recommendations on TP documentations under the BEPS project, certain changes in TP regulations has been inserted time to time. These changes are in line with the OECD Action Plan 13 i.e. they require 3- tier approach of documentation which have been effective from F.Y. 2016-17.

Applicability of documentation structure:

Master File:

Rule 10DA of the Income tax Rules, 1962 (“the Rules”) (as amended) provides that:

Master File: Every resident Constituent Entity of the International Group is required to provide Master File in Part A of Form 3CEAA to the Income tax department irrespective of the size and nature of transactions whereas Part B of Form 3CEAA is required to be furnished only if the following conditions are triggered:

• The Consolidated revenue of the International Group, of which such entity is a constituent, exceeds Rs. 500 crores; and
• The aggregate value of International transactions of such entity exceeds Rs. 50 crores during the accounting year (as per its books of account).

Note: The value of International transactions to be taken as Rs. 10 crores in place of Rs. 50 crores limit in respect of transactions relating to purchase, sale, transfer, lease or use of intangible property during the accounting year.

Country by Country (CbC) Reporting

Rule 10DA of the Income tax Rules, 1962 (“the Rules”) (as amended) provides that:

Country by Country (CbC) Reporting: The provisions of furnishing of CbC Report to the Income tax department is applicable only if the consolidated revenue of International Group is more than Rs. 5,500 crores as reflected in the consolidated financial statements for the preceding accounting year.

Details to be furnished in Master File:

The details required to be furnished in form 3CEAA include the following:

• a list of all entities of the international group along with their addresses;
• a chart depicting the legal status of the constituent entity and ownership structure of the entire international group;
• a description of the business of international group during the accounting year;
• a description of the overall strategy of the international group for the development, ownership and exploitation of intangible property, including location of principal research and development facilities and their management;
• a list of all entities of the international group engaged in development and management of intangible property along with their addresses;
• a list of all the important intangible property or groups of intangible property owned by the international group along with the names and addresses of the group entities that legally own such intangible property;
• a list and brief description of important agreements among members of the international group related to intangible property, including cost contribution arrangements, principal research service agreements and license agreements;
• a detailed description of the transfer pricing policies of the international group related to research and development and intangible property;
• a description of important transfers of interest in intangible property, if any, among entities of the international group, including the name and address of the selling and buying entities and the compensation paid for such transfers;
• a detailed description of the financing arrangements of the international group, including the names and addresses of the top ten unrelated lenders;
• a list of group entities that provide central financing functions, including their place of operation and of effective management;
• a detailed description of the transfer pricing policies of the international group related to financing arrangements among group entities;
• a copy of the annual consolidated financial statement of the international group; and
• a list and brief description of the existing unilateral advance pricing agreements and other tax rulings in respect of the international group for allocation of income among countries.

Details required to be furnished in Form 3CEAD i.e Country By Country Reporting

The report in respect of an international group shall include—

> the aggregate information in respect of the amount of revenue, profit or loss before income-tax, amount of income-tax paid, amount of income-tax accrued, stated capital, accumulated earnings, number of employees and tangible assets not being cash or cash equivalents, with regard to each country or territory in which the group operates;

> the details of each constituent entity of the group including the country or territory in which such constituent entity is incorporated or organized or established and the country or territory where it is resident;

> the nature and details of the main business activity or activities of each constituent entity; and

> any other information as may be prescribed.

Time Limit to File form 3CEAA

As per Rule 10DB of the Income tax Rules, 1962, Form 3CEAA is required to be furnished:

From F.Y. 2017-18 and onwards – 12 months from the end of accounting year

Various countries who have implemented these provisions will be the one who will get benefited as they will be able to find out whether MNE is transferring its profit to a lower tax jurisdiction from these detailed reports.

Important Note:

As stated above, the Central Board of Direct Taxes(CBDT) had notified Rules 10DA, 10DB and Form Nos. 3CEAA to 3CEAE in Income-tax Rules, 1962. The Income Tax (2^nd Amendment) Rules, 2020 has amended rules 10DA and 10DB and notification no. 03/2020 dated 06.01.2020 has already been issued in this regard.  As per the amended sub-rule(1) of rule 10DB, the income tax authority for the purpose of section 286 shall be the Joint Commissioner as may be designated by the Director General of Income tax (Risk Assessment).

In view of the above amendment and in exercise of the powers conferred by section 286 of the Act, the Director General of Income tax (Risk Assessment) has designated the Joint Director of Income tax (Risk Assessment)-1 having office at 4^th Floor, C-Block, Dr. S.P. Mukherjee Civic Centre, Minto Road, New Delhi-110002 as the Income tax Authority for the purpose of section 286 of the Act, with effect from the first day of April, 2020.

{Author is a CA Final Rank holder (AIR 34 – Nov’15) currently working in a Fortune 500 company and can be reached at his facebook page – Jatin’s Tax Arena ( https://www.facebook.com/TheTaxArena/?ref=aymt_homepage_panel )or his Linkedin account – ( https://www.linkedin.com/in/ca-jatin-grover-a0aa3923 )}

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(Republished with Amendments by Team Taxguru)