Transfer pricing guidelines– Global/Indian scene: Latest income tax obligations of entities
When I went to one of the nationalized bank’s corporate office for discussions on transfer pricing scene at global/Indian situations, I was informed that India has already committed to implement the recommendations of 2015 Final report on Action 13, titled “Transfer Pricing Documentation and Country-by-Country Reporting” identified under the OECD Base Erosion and profit Shifting (BEPS) Project, section 286 of the Income-Tax Act, 1961(“the act”) which was inserted under Finance Act, 2016.
The following article has been written to explain the salient features of the reporting requirements enforced on corporations in India/abroad which are said to assist tax authorities around the world to use transfer pricing audit to get the tax due to their countries from corporations who seemed to have found various ways to avoid the tax owed by them.
Transfer pricing: basic background and the history of civilized nations’ efforts to recover the taxes owed to them by big corporations
Transfer pricing can be delineated as the price paid for goods transferred from one economic unit to another, assuming that the two units involved are situated in different countries, but belong to the same multinational firm. This is popularly known as transactions among related parties. Unlike arm’s length transactions which takes place between a buyer and seller who are working in market place transactions to make profits on business terms purely acceptable to both of them, transfer pricing among related parties artificially try to push the income in a country which has low tax rates and account for expenses in a country with high tax rate like India.
The following example may explain the issues.
Let us analyze the following case for a fortune U S based company:
|Country||Profit Before tax ($b)||Profit before Tax contribution (%)||Employees||Customers||Effective Tax rate|
With 4% of employees and 1% customers– Ireland contributes to 64% of Group’s profit, on which tax is paid at a solitary rate of 0.06%, so much for the intelligence of the tax consultants and that too under the able eyes of US and other nations which resulted in the action of all countries to stop this plunder.
1. In September 2014, the countries participating in the OECD/G20 Base Erosion and Profit Shifting (BEPS) Project published the report “Guidance on Transfer Pricing Documentation and Country-by- Country Reporting” (the September Report). The September Report was presented to the G20 Finance Ministers at their September 2014 meeting in Cairns and to G20 Leaders at their November 2014 meeting in Brisbane, Australia.
2. The September Report described a three-tiered standardized approach to transfer pricing documentation. The following information has been taken out of above report. Reference also given at end.
This standard consists of
- a master file containing standardized information relevant for all MNE group members;(master file)
- a local file referring specifically to material transactions of the local taxpayer; and
- a Country-by-Country Report containing certain information relating to the global allocation of the MNE group’s income and taxes paid together with certain indicators of the location of economic activity within the MNE group (the “CbC Report”).
3. The report wanted timely action by the member countries who attended the conference.
4. This note sets out guidance on the following matters relating to the implementation of the CbC Report:
(i) the timing of preparation and filing of the CbC Report,
(ii) which MNE groups should be required to file the CbC Report,
(iii) the necessary conditions underpinning the obtaining and the use of the CbC Report by jurisdictions and
(iv) the framework for government-to-government mechanisms to exchange CbC Reports together with the work plan for developing an implementation package.
For a layman, it means that lot of information about various multi national enterprises (MNE) will be exchanged periodically among those countries who evolve suitable guidelines/rules for collection, study and exchange of the information.
For what reason, this much labor is required, is the common refrain among us.
Let us flow with our narratives. India one of the prominent signatories to the conference, through Ministry of Finance, Government of India vide its communication F.No. 370142/25/2017-TPL dated 6th October 2017 invited public comments on would be submission of following statements by the concerned organizations:
(i) Rules 10 DA and 10DB would be inserted and forms 3 CEBA to 3 CEBE would also be introduced.
(ii) Information about 10 DA is as under:
- Information to be maintained and submitted about any international group if the consolidated revenue from consolidated financial statement exceeded Re 500 Crores and the aggregate value of international transactions exceeded Re 50 crores.
- For fun, I have noted some of the information and documents related like list of all entities with address, legal status of the entity, description of business, obviously the nature of business, important drivers of profits of business, description of supply chain of 5 largest products or services———–(I actually counted 20 items with descriptions)
- The report is to be submitted in form no 3 CEBA to be submitted to Director General of Income-Tax on or before the due date for the reporting accounting year 2016-17 at any time on or before 31stof March 2018. Any relevant official can refer to the communication of Income Tax department.
Information about form 10DB– furnishing report in respect of an international group:
- Under section 286, for information about parent body, if not resident, its authorized entity will inform the Director General of Income Tax. This report will be submitted 60 days prior to due date.
- For the purpose of above section, the total consolidated revenue of the international group shall be Re 5500 Crores.
- Details of electronic filing will be notified in due course by concerned authorities.
Discussion about form 3CEBA and form 3 CEBB is given as under:
Form 3 CEBA: (Master file)
- Part A: Serial numbers 1 to 7 consist of information like name, address, permanent account number of the assessee, name of the international group of which the assessee is a constituent entity, address of the international group, details of constituent entities along with PAN and address.
- Part B: Serial numbered from 1 till 14, this form requires information like nature of business, important drivers of profits of business, description of five largest products, service agreements among the entities, details of major service providers of the group, transfer pricing policies for allocating service costs and determining prices to be paid for intra- group services, details of major geographical markets, the functions, assets, and risks analysis of the constituent entities of the group that contribute minimum of 10% of revenues/assets/profits of the group and details of important business restructuring transactions acquisitions and divestments during the reporting accounting year.
- Descriptions of the overall strategy of the group for development, ownership and exploitation of intangibles. Details of important intangibles, agreements related to them, details of transfer pricing policies, details of intangibles transferred among the group members and details of existing unilateral advance pricing agreements.
Form No. 3CEBB
It is a notification report by a constituent entity, resident in India, of a non-resident international group (I may refer Hindustan Unilever as an entity with details of Unilever group, as principal, as an example).
Form No. 3CEBC
Details like name of reporting entity, PAN, address, whether the reporting entity is the parent entity of the group, with details in
- Overview of allocation of income, taxes, and business activities by tax jurisdiction with details of revenues, profit/loss before income tax, income tax paid on cash basis, income tax accrued report able accounting year, stated capital, accumulated earnings, number of employees and tangible assets other than cash and cash equivalent.
List of all the constituent entities of the multinational enterprises group included in each aggregation per tax jurisdiction with details of jurisdiction, names of entities, main business activity details like R&D, holding of intellectual property etc.
- The objective of getting Country-by-Country report (Cb CR) is to aid tax authorities perform a transfer pricing risk assessment.
- The objective of taking Master File(MF) is to ensure tax payers give appropriate consideration to setting prices consistent with the arm’s-length principle.
- Local File(LF) enables information needed for tax authority audit.
- Form 3 CEAD is the same as the one prescribed by OECD under the name Country by Country report which in future will enable exchange of reports among the countries, compare the rates/practices observed among related parties and if variations are extra ordinarily large harming countries with substantial tax rates, action may be taken for tax audit with more information, comparison with details with other countries who have agreed for this cooperation. Right now, there is a feeling with professionals that by providing some bare information and good networking is enough though this approach may not work with a highly trained and professional pool of people working in modern income tax departments.
- Form No. 3CEAA with Part A and Part B have already been explained in detail.
All the returns have to submitted by either 31st March 2018 or 1ST March 2018.
Penalty for non- submission of Cb CR has been prescribed as INR 5000 per day, failure to furnish additional information or documents sought by revenue authorities invites steep fine of INR 5000 per day from the day on which the period for furnishing the information and document expires. A huge penalty of INR 500,000 for inaccurate information filed under Cb CR has been mentioned.
Transfer pricing has been playing its part since 1950 on wards in developed countries to avoid taxes, evolve strategies to shift income tax from high tax regimes to less tax ones and finally playing more sophisticated procedures to earn more money. It is reported that in the year 2011 Starbucks paid no corporation tax in UK for a turnover of 398 million sterling pounds, Google paid a corporation tax of 6 million sterling pounds for a turnover of 2.6 billion sterling pounds while Amazon.com paid no income- tax for a turnover of3.3 billion sterling pounds. Highly organized and developed countries like USA, UK or OECD countries found to their dismay that they got nothing as tax while striving hard to provide the best financial or technical atmosphere for one to explode and virtually mint profits at no cost.
Therefore, BEPS Action 13-three tired Transfer Pricing Documentation got into action and mutual cooperation among OECD/G 20 countries has come into play.
The writer having got excited over this development therefore wrote this article.
I do visualize a situation where Indian professionals (both private and public sector including the government officials) from Finance, accounting or related software fields will guide the world with their knowledge and we as a nation would receive its appropriate tax-dues from its tax payers while offering the best services.
- OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations (612) pages documentation available for reading from the web site of OECD or in book form – please do it for clear understanding of transfer pricing from the best experts in the whole world. Reading pleasures.
- Beautifully produced Ministry of Finance, Government of India, Dept. of Revenue, Central Board of Direct Taxes, communication, Number F.No. 370142/25/2017-TPL Dated 6thOctober 2017 – 15 pages with annexure. It is the most useful communication for submission of statements on the subject when it will be finally issued. Right now, it is final stage of conclusion. Please do contact income tax department for proper advice.
About the author : Subramanian Natarajan C.P.A. (USA), M.Sc., CAIIB took voluntary retirement in 2000 from Punjab National Bank after handling various facets of banking like deposit mobilization, foreign exchange, auditing and borrower accounts. After living in USA for 12 years during which period he worked in international auditing firms specializing in international tax, auditing, IFRS etc. He can be reached at email@example.com. Tel: 7503562701, 9015613229. He currently lives in Delhi. His name appears as tax consultant in web site of American embassy, New Delhi.