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The Finance Bill 2016 (Bill) contains few important changes which are emanating from India’s active participation in the OECD-G20 BEPS [1] initiative. Before we go into the changes related to TP documentation, it may be worthwhile to take a look back at the overall BEPS project and what is expected from the same in the long term.

Overview of BEPS project

The OECD released the final reports for the 15 BEPS Action Plans during October 2015, covering a wide range of international tax and transfer pricing topics which, as per consensus of the participating nations, will help tax administrators reduce double non taxation or tax base erosion or profit shifting from countries of true economic activity to countries with zero or minimal tax rates. Out of the 15 BEPS Action Plans, certain actions were considered as minimum standards which participating countries can immediately act upon. The others were classified as common approaches or best practices which participating nations were free to incorporate in its regulation and administrative practice.

The new TP documentation framework (i.e. Master File and Local File) and country-by-country (CbC) reporting framework included in Action Plan 13 (AP 13) is one of the minimum standard requirement and a number of OECD member countries and G20 participants have already introduced the new framework in their domestic law over the past few months. The Indian Government was committed towards AP 13 and as expected, has introduced the new framework in Finance Bill, 2016.

The 3-tier TP documentation framework

The new framework includes 3 components, all of which will be incorporated in the Income-tax Act:

  • Master File,
  • Local File, and
  • Country by country report 

The first two will be part of the expanded section 92D documentation rules. Though the Finance Bill does not expressly state about the Local File, the structure of the same as per AP 13 is broadly similar to the existing rule 10D documentation framework. Further, a new section 286 has been introduced for the CbC reporting framework and procedures.

The Master File is meant to provide an overview of the multinational (MNC) group’s global operations, based on a standardised template which includes various qualitative and quantitative information like organization structure, business drivers, product offerings, intangibles, financial arrangements, tax position etc. This will be a single report prepared at the headquarter level for each MNC, covering its entire global operations.

The Local File is meant to provide entity specific information for each jurisdictions and contains more detailed information related to the entity and its intra-group transactions, including detailed comparability and functional analysis, benchmarking studies etc.[2] 

The CBC Report is intended to provide quantitative information relation to the global allocation of the MNC’s income and taxes paid along with an indication of the economic activity, nature of business and assets situated in each country. This template will include details like revenue, profit/loss, taxes paid, employee count, assets, etc.[3]

The Memorandum to the Finance Bill clarifies that the CBC Reporting will be applicable for Indian groups having consolidated turnover in excess of EUR 750 million (INR 5395 crore, at current exchange rates), which is the prescribed turnover in AP 13. However, no threshold is prescribed for the Master File or Local File and one has to wait for the detailed Rules to see of any threshold based on transaction value or turnover is provided. Considering the global practices, some countries have included a turnover based threshold for Master File too.

Based on the above, let us now understand the potential impact for the following 4 categories of Indian taxpayers:

A. Impact for Indian parent entities having consolidated turnover greater than INR 5395 cr

Indian parent companies having turnover exceeding the prescribed threshold have to prepare the CbC report and Master File in relation to their global operations, along with the Local File in relation Indian entities. Further, depending on the local TP regulations of the countries where the Indian MNC operates, Local Files may need to be prepared for each of such overseas entities.

The CbC report will be submitted to the prescribed authority in India (expectedly, at Competent Authority or similar senior Revenue Officer level) and based on the CbC report exchange agreement that India will have with different countries, the same will be shared with such other countries’ Competent Authorities where the Indian MNC operates. Thus in the normal course, the parent entity may not have to submit the CbC report directly in various countries, if India has a CbC report exchange agreement with such jurisdictions.

It is important to note that for the purpose of determining whether the parent company is eligible for CBC reporting, one has to look at the level of financial statement consolidation for the group as per Companies Act, AS 21 and Listing Agreement. Further, for non-listed entities, one has to consider the group consolidated turnover assuming that such entities would have prepared consolidated accounts as per the laws. Hence, unlisted groups having significant global operations and turnover in excess of INR 5,395 cr. will also fall under the applicability of CbC reporting.

The law also allows for a group entity other than the ultimate parent to be designated as the ‘alternate reporting entity’, which will carry the responsibility of submitting the CbC report in the relevant tax jurisdiction where such group entity is tax resident.

The Indian parent also need to prepare and maintain the Master File in relation its global operations. This will be a stand-alone document which not only needs to be submitted to the prescribed authority in India and depending on the regulations of the foreign jurisdictions where the group operates, the Master File may also have to be submitted by the foreign subsidiaries in those countries. Therefore, the parent entity should ensure that a robust and comprehensive Master File is prepared which will provide to each tax authority suitable overview of the group’s operations. As mentioned earlier, the turnover or transaction value threshold for Master File preparation has not been prescribed yet and that may be included in the detailed regulations for Master File and Local File preparation.

B. Impact for Indian subsidiaries being part of global MNC having consolidated turnover greater than EUR 750m

These category of companies have to firstly make an annual declaration to the prescribed authority with the following:

  i.  whether it is the alternate reporting entity for any MNC group which is preparing CbC report, or

 ii. the details of the parent entity or the alternate reporting entity of the group preparing the CbC report and its tax residence.

This declaration will help the authorities keep a track of the relevant CbC report filing jurisdiction.

The Indian subsidiary will not be required to submit the CbC report directly in India and as mentioned earlier, the same will be shared between the Competent Authorities under an exchange agreement. However, the local subsidiary may have to submit the CbC report directly to Indian authorities under the following situations:

  1. The parent entity or the alternate reporting entity is tax resident in a country with whom India does not have a CbC report exchange agreement; or

  2. There a systemic failure in relation to CbC report exchange with the relevant jurisdiction.

Hence, the direct filing requirement may arise only if Indian authorities have no other option to gather the CbC report from the relevant overseas jurisdiction of the group parent or alternate reporting entity.

These category of companies also need to obtain a copy of the Master File prepared by the parent entity for submission with the prescribed authorities. Obviously, the Local File in relation to international transactions has to be prepared as per the regulations. The detailed regulations for Master File and Local File preparation or submission is yet to be published.


C. 
Impact for Indian subsidiaries being part of global MNC having consolidated turnover less than EUR 750m

These category of companies may have to make an annual declaration to the prescribed authority, to the effect that the group is not liable to prepare CbC report due to the prescribed turnover threshold. While the need of this declaration is not clear from the law, but one can reasonably presume that the tax authorities may expect all Indian subsidiaries of MNCs to make such declaration, to keep track of CbC report filing requirement or exemption.

These category of companies may also need to obtain a copy of the Master File prepared by the parent entity, if any, for submission with the prescribed authorities. The Local File in relation to international transactions has to be prepared as per the regulations. As stated above, the detailed regulations for Master File and Local File preparation or submission is yet to be published.


Next steps

The broad framework of the CbC report and new TP documentation requirement has been introduced in the Finance Bill. While taxpayers have to wait for the detailed rules and regulations to evaluate the exact compliance requirement in India and also have to track the global developments in this regard, since BEPS AP13 is pretty much clear in terms of what is expected from MNCs and the underlying tax risk evaluation approach is evident. Hence, taxpayers across turnover categories should take proactive steps to evaluate the additional documentation and tax information analysis requirement under the new framework. Further, the underlying tax risk identification should be also be carried out for taking corrective steps for aligning profit generation with the location of substantial economic and commercial activity.

 

[1]   OECD / G20 Base Erosion and Profit Shifting Project (http://www.oecd.org/ctp/beps.htm)

[2] The exact contents of Master File and Local File under Indian TP regulations are yet to be notified.

[3] The exact content of CbC report under Indian TP regulations is yet to be notified, but the same will be based on the AP 13 template.


 

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