Rajesh Kumar Choudhary
OECD
Background
OECD stands for Organization for Economic Co-operation and Development. It is an international organization comprising of 34 countries with an objective to stimulate economic progress and world trade. The organization actively conducts researches in various areas of taxation and economic development based on which it issues recommendations to its member countries. The organization is frontrunner in the field of research and developments in Transfer Pricing and taxation of intangibles and digital economies. In this regard, the organization has developed an action plan consisting of fifteen actions to address Base Erosion and Profit Shifting (“BEPS”) issues in a co-ordinated and comprehensive manner. Action 13 of the Action plan related to ‘Re-examining transfer pricing documentation’ with an objective to develop rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business. In this respect, OECD published “Action-13: Guidelines on the implementation of Transfer Pricing Documentation and Country-by-Country Reporting” containing detailed recommendations for the documentations to be maintained by the countries.
BEPS Recommendations
In the report on Action 13 of BEPS Action plan, OECD has recommended a three tier structure of reporting. It consists of:
- Country-by-Country (“CbC”) report: It shall contain information relating to the MNE group’s income and taxes along with other indicators of economic activity for each of their country of operation. The parent entity of an international group is required to submit the CbC report to the prescribed authority in its country of residence. This report shall be shared among the countries vide an automatic information exchange agreement between them.
- Master File: It shall contain standardized document and information which are relevant for all the members of MNE group. It shall provide an overview of MNE group’s TP practices. The Master File shall be furnished by each entity of the group to its local tax authority.
- Local File: It shall contain details of transactions of local taxpayers and shall be prepared with respect to the transactions with associated enterprise undertaken by the entity.
Indian Transfer Pricing Regulations
India is progressively amending Transfer Pricing (“TP”) Regulations to align domestic provisions with international best practices.The OECD in BEPS Action plan 13 has provided for maintenance of additional documentation and country by country reporting of various measures of economic activity. Being an active member of OECD, the country has quickly amended its TP Regulations to incorporate the Country-by-Country (“CbC”) reporting norms as recommended by OECD. The changes made in the Indian TP regulations by the Finance Act, 2016 have been highlighted below.The rules in respect to these regulations are yet to be notified by the government.
Definitions
1) A ‘constituent entity’ means:
a) any separate entity of an international group that is included in the consolidated financial statement of the group for financial reporting purposes, or may be included for the said purpose, if the equity shares of any entity of the international group were to be listed on a stock exchange;
b) any such entity which is excluded from the consolidated financial statement of the group solely on the basis of size or materiality; or
c) any permanent establishment of any separate business entity of the international group included in (a) or (b) above, if such entity prepares a separate financial statement for such permanent establishment for any purposes.
2) An ‘international group’ means any group that includes:
a) two or more enterprises which are residents of different countries; or
b) an enterprise, being a resident of one country which carries on any business through a permanent establishment in other countries.
3) A ‘systematic failure’ with respect to a country means the country has an agreement for exchange of CbC report with India, but:
a) it has suspended automatic exchange in violation of such agreement; or
b) has persistently failed to automatically provide to India the report in its possession in respect of any international group having a constituent entity resident in India.
CbC Reporting
1) Every constituent entity of a MNE group whose parent entity is not resident in India shall notify the prescribed income tax authority:
a. whether it is alternate reporting entity of such international group; or
b. the details of the parent entity or alternate reporting entity of the international group along with their country of residence.
This shall help the government in determining the jurisdiction from where CbC report in respect to the group can be obtained under the information exchange agreement. Alternatively, it shall also help the government in determining its obligations with respect to sharing of CbC report with other country in case the Indian entity is the parent entity or the alternate reporting entity of an international group.
2) Every parent entity or alternate reporting entity of a MNE group which is resident in India shall prepare and furnish the CbC report before the due date of filing of Income Tax Return. Such report shall contain the following details:
a) Information with respect to the amount of revenue, profit or loss before tax, amount of taxes paid, taxes accrued, stated capital, accumulated earnings, number of employees and tangible assets for each country in which the group operates.
b) Details of each of the constituent entity of the group along with their country of establishment and residence.
c) Nature and details of the main business activity of each constituent entity.
d) Any other information which may be prescribed.
The format for submission of the above mentioned information shall be notified by the Rules to be notified in this regard. However, the memorandum to the Finance Act, 2016 indicates that the OECD prescribed template shall be adopted for the purpose.
3) The abovementioned information shall be maintained and furnished by the Indian constituent entity of an international group if the parent entity of the group is resident of a country:
a) with which India does not have an arrangement for exchange of CbC report; or
b) where India has an agreement for exchange of such information, but there has been systematic failure on part of that country and such failure has been intimated by the prescribed authority to such constituent entity.
In case more than one constituent entity of a group are residents in India, then such CbC report can be furnished by either of those entities that has been designated by the group to furnish the report.
4) However, even in cases mentioned in point 3 above, the Indian constituent entity is not required to provide the CbC report, where
a) instead of the parent entity, such report has been furnished by an alternate reporting entity of the international group with the tax authority of its country of residence;
b) the CbC report is required to be furnished under the local laws of that country;
c) that country has entered into an agreement with India for exchange of the said report for the international group;
d) the prescribe authority in India has not conveyed any systematic failure in respect of the said country to any Indian constituent entity of the group;
the said country has been informed in writing by such constituent entity that it is the alternate reporting entity on behalf of its international group.
Master file and local file
In respect to the maintenance of the master file, every constituent entity of an international group, in addition to the information related to the international transaction, shall also maintain and furnish such documents as may be prescribed by the rules to the prescribed authority. However, no threshold has been prescribed for the maintenance and furnishing of master file. Further, the memorandum indicates that the documents mandated for the master file by the OECD in its BEPS Action 13 report shall be prescribed in the rules.
Regulations relating to the maintenance of local file are already enshrined in the TP regulations and no amendment has been made in this regard. The same may continue or may be aligned to the recommendations of the OECD by the rules to be prescribed.
Notice for further information
For the purpose of determining the accuracy of the report furnished by the reporting entity, the prescribed authority may issue a notice asking the entity to furnish such information or documents as may be deemed necessary within thirty days of receipt of notice. On an application made by the entity, the prescribed authority may extend the period of thirty days by a further period not exceeding thirty days.
Applicability
These amendments shall be applicable from 1st April, 2017 and shall apply to the Assessment Year 2017-18 and subsequent assessment years. Further, the provisions relating to CbC reporting shall be applicable to the international group having consolidated group revenue above a threshold limit to be prescribed. The memorandum indicates that the current international consensus for a threshold of €700 million equivalent in local currency may be prescribed as the threshold limit. For the purpose of conversion, the exchange rate prevailing on the last day of the year preceding the previous year shall be used.
Fines and Penalties
To deter non-compliance with the provisions, stringent penalties have been provided as are mentioned below.
| Particulars | Fines and Penalties |
| Failure to furnish documentation by Indian Constituent Entity [Sec. 271AA(2)] |
INR 5,00,000 |
| Failure to furnish CbC report by the Parent entity [Sec. 271GB(1)] | |
| − If failure continues for period not exceeding 1 month | INR 5,000 per day |
| − After one month | INR 15,000 per day |
| Failure to furnish information/document required in notice issued under section 286(6) [Sec. 271GB(2)] | INR 5,000 per day from the expiry of prescribed period |
| Failure to pay penalty even after an order directing such payment has been passed [Sec. 271GB(3)] | INR 50,000 per day from the date of service of order |
| Furnishing of inaccurate particulars by the entity knowingly [Sec. 271GB(4)] |
INR 5,00,000 |
Conclusion
The CbC report is to be furnished by the entity alongwith the return of income. The limited time period provided to the taxpayers for the preparation of such extensive documentation could pose a serious challenge for the taxpayers who would be preparing such documentation for the first time. Further, in the absence of any threshold limit for the maintenance of master file, it may be deduced that it can be made applicable to all MNEs operating in India. This could again have huge implication and could amount to disproportionate cost and burden for the taxpayers.
In view of the above, taxpayers are advised to gear up from now and analyse their global value chain to ensure that the profits accruing in various countries are commensurate with the level of operations there. Further, they should start analysing the data that is required for the CbC report to identify the areas where corrective measures need to be taken. This will ensure that they are able to comply with the deadlines to avoid paying huge penalties.
