Jatin Grover

Jatin GroverCbCR (Country by Country Report) is one of the recent amendment which 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)
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To align with OECD recommendations on TP documentations under the BEPS project, the Union Budget of 2016 introduced certain changes in TP regulations. These changes are in line with the OECD Action Plan 13 i.e. they require 3- tier approach of documentation which is effective from F.Y. 2016-17 (A.Y. 2017-18).

Now you will be wondering how complex it will be for a small enterprise to comply with all these reporting requirement. In order to preserve small MNEs from such a comprehensive and contemporaneous documentation OECD has provided that CbCR is mandatory only to MNEs with annual consolidated group turnover in the immediately preceding fiscal year exceeding EUR 750 mn. However it should be kept in mind that this monetary threshold does not apply to Master File and Local file for which limit will be decided by each country and can also be lower than EUR 750 mn.

CbC reporting, as mentioned in section 286 of the Income Tax Act, for an international group having presence in India shall apply only if the consolidated revenue of the international group in the previous year 2015-16 exceeds Rs.5395 crore (the equivalent would be determinable based on the exchange rate as on the last day of previous year 2015-16).

Section 286(2) of The Income Tax Act, 1961 has prescribed that, “Every parent entity or the alternate reporting entity, resident in India, shall, for every reporting accounting year, in respect of the international group of which it is a constituent, furnish a report, to the prescribed authority on or before the due date specified under sub-section (1) of section 139, for furnishing the return of income for the relevant accounting year, in the form and manner as may be prescribed.” Thus reporting is to be done on or before 30th November, 2017 for F.Y. 2016-17 since these reporting will be applicable to only those assessee on whom transfer pricing audit will be applicable. All companies should not look for extension of date of CbCR, however in case government decides to extend the due date then still it cannot be extended more than 31st March, 2018 as OECD has prescribed in its Implementation package that CbCR should be filed no later than 12 months after the last day of reporting Fiscal Year of the MNE group.

Now one might wonder how difficult it is going to comply with these provisions, then it should be considered that it is a comprehensive and contemporaneous documentation and will require a lot of data from whole supply chain of the MNE, each and every country in which MNE’s Associated Enterprise (AE) exists. For this purpose many MNE’s in India have already completed draft reporting for FY 2015-16 for the purpose of checking their systems and ensure no Tax Avoidance is getting reflected from these documentations.

CbC report requires the submission of aggregated financial and tax data for all tax jurisdictions of the MNEs, including revenues from related and unrelated parties, profit (loss) before income tax, income taxes paid and accrued income tax, stated capital, accumulated earnings, number of employees, and tangible assets. In addition, the CbC report requires a listing of all the members and permanent establishments of the multinational group, describing their economic activities; place of incorporation, in addition to certain other information.

Master file provides a complete picture of the group’s global operations, including organizational structure, an analysis of profit drivers, supply chains, intangibles, intercompany financing and certain financial and tax information.

After understanding Why such reporting, who needs to report, when to report, what are the difficulties you must be looking for what is the benefit of such reporting and who will get benefited. Answer to this question of yours has already been given in the initial paragraphs of the Article, 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.

{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 )}

Author Bio

Qualification: CA in Job / Business
Company: Fortune 500 Company
Location: Mumbai, Maharashtra, IN
Member Since: 06 Oct 2017 | Total Posts: 8

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