Executive Summary:

The OECD report on Action Plan 13 of BEPS Action plan provides for re-examination of transfer pricing documentation. It also provides for a template for country-by-country reporting of income, earnings, taxes paid and certain measure of economic activity. It is recommended in the BEPS report that the countries should adopt a standardized approach to transfer pricing documentation. India, being an active member of OECD, has made amendments under Section 92D of the Income tax Act, 1961 (“the Act”) in order to enhance the transfer pricing documentation. Further, Section 286 has been inserted under the Act in order to make CbC Reporting mandatory for certain category of MNEs.

Main Content:

A. Meaning of CbC Report:

BEPS Action Plan 13 on “Transfer Pricing Documentation and Country-by-Country Reporting” provides a template for multinational enterprises (MNEs) to report annually and for each tax jurisdiction in which they do business the information set out therein. This report is called the Country-by-Country (CbC) Report.

B. Three-tier approach to enhance documentation: It is recommended in the BEPS report that the countries should adopt a standardized approach to transfer pricing documentation. A three-tiered structure has been mandated consisting of:-

(i) A master file containing standardized information relevant for all multinational enterprises (MNE) group members;

(ii) A local file referring specifically to material transactions of the local taxpayer; and

(iii) A country-by-country report (CbC 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.

Diagram 1: Three-tier structure for documentation prescribed by OECD

C. 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.

D. Filing requirements and details required to be furnished in Master File forms:

Time Limit to File form 3CEAA

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

F.Y. 2016-17 – At any time on or before the 31st day of March, 2018.

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

Authority with whom it is required to be furnished:

Form 3CEAA shall be furnished to the Director General of Income-tax (Risk Assessment).

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.

Note: Where there are more than one constituent entities resident in India of an international group, then the report in Form3CEAA may be furnished by that constituent entity which has been designated by the international group to furnish the said report and the same has been intimated by the designated constituent entity to the Director General of Income-tax (Risk Assessment) in Form 3CEAB within 12 months from the end of accounting year.

E. Filing requirements and details required to be furnished in CbC Reporting:

Filing requirements:

Diagram 2: Filing Requirements for CbC Reporting

Details required to be furnished in Form 3CEAD by Parent Entity or Alternate Reporting Entity

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.

Additional requirements for the Constituent entities (Section 286(4))

If the Constituent entities resident in India belongs to an International Group of which parent is resident of a country with which India does not have an agreement providing for exchange of the report OR there has been a systemic failure of the country or territory and the said failure has been intimated by the prescribed authority to such constituent entity, then such constituent entity is also required to furnish the report under Form 3CEAD.

If there are more than one of such constituent entities, then the International Group can designate one of such constituent entity to file the report.

Exception:

Nothing contained in Section 286(4) shall apply, if, an alternate reporting entity of the international group has furnished a report of the nature referred to in sub-section (2), with the tax authority of the country or territory in which such entity is resident, on or before the date specified in the said sub-section and the following conditions are satisfied, namely:—

(a) the report is required to be furnished under the law for the time being in force in the said country or territory;

(b) the said country or territory has entered into an agreement with India providing for exchange of the said report;

(c) the prescribed authority has not conveyed any systemic failure in respect of the said country or territory to any constituent entity of the group that is resident in India;

(d) the said country or territory has been informed in writing by the constituent entity that it is the alternate reporting entity on behalf of the international group; and

(e) the prescribed authority has been informed by the entities referred to in sub-section (4) in accordance with sub-section (1).

F. Important Definitions:

International group means any group that includes,—

(i) two or more enterprises which are resident of different countries or territories; or

(ii) an enterprise, being a resident of one country or territory, which carries on any business through a permanent establishment in other countries or territories.

Constituent entity means,—

(i) any separate entity of an international group that is included in the consolidated financial statement of the said group for financial reporting purposes, or may be so included for the said purpose, if the equity share of any entity of the international group were to be listed on a stock exchange;

(ii) any such entity that is excluded from the consolidated financial statement of the international group solely on the basis of size or materiality; or

(iii) any permanent establishment of any separate business entity of the international group included in clause (i)* or clause (ii)*, if such business unit prepares a separate financial statement for such permanent establishment for financial reporting, regulatory, tax reporting or internal management control purposes.

Parent Entity means a constituent entity, of an international group holding, directly or indirectly, an interest in one or more of the other constituent entities of the international group, such that,—

(i) it is required to prepare a consolidated financial statement under any law for the time being in force or the accounting standards of the country or territory of which the entity is resident; or

(ii) it would have been required to prepare a consolidated financial statement had the equity shares of any of the enterprises were listed on a stock exchange,

and, there is no other constituent entity of such group which, due to ownership of any interest, directly or indirectly, in the first mentioned constituent entity, is required to prepare a consolidated financial statement, under the circumstances referred to in clause (i) or clause (ii), that includes the separate financial statement of the first mentioned constituent entity;

Alternate Reporting Entity means any constituent entity of the international group that has been designated by such group, in the place of the parent entity, to furnish the report of the nature referred to in Section 286(2) of the Act in the country or territory in which the said constituent entity is resident on behalf of such group.

Accounting Year means,—

(i) a previous year, in a case where the parent entity or alternate reporting entity is resident in India; or

(ii) an annual accounting period, with respect to which the parent entity of the international group prepares its financial statements under any law for the time being in force or the applicable accounting standards of the country or territory of which such entity is resident, in any other case;

Consolidated Financial Statement means the financial statement of an international group in which the assets, liabilities, income, expenses and cash flows of the parent entity and the constituent entities are presented as those of a single economic entity;

Parent Entity means a constituent entity, of an international group holding, directly or indirectly, an interest in one or more of the other constituent entities of the international group, such that,—

(i) it is required to prepare a consolidated financial statement under any law for the time being in force or the accounting standards of the country or territory of which the entity is resident; or

(ii) it would have been required to prepare a consolidated financial statement had the equity shares of any of the enterprises were listed on a stock exchange,

and, there is no other constituent entity of such group which, due to ownership of any interest, directly or indirectly, in the first mentioned constituent entity, is required to prepare a consolidated financial statement, under the circumstances referred to in *clause (i) or *clause (ii), that includes the separate financial statement of the first mentioned constituent entity.

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