The prolonged wait is finally over. Nearly 18 months after legislating the adoption of country-by-country reporting (CbCR) for multinationals, the CBDT has come up with draft rules in this regard, seeking to usher in a rigorous regime of compliance and disclosure for MNCs operating in India.
The Central Board of Direct Taxes (CBDT) has, in line with global best practices, now sought public comments on the draft rules. The proposed rules spell out how and in which form the multinationals would have to comply with the maintaining and furnishing of transfer pricing documentation in the Master File (MF) and the country-by-country report.
With the proposed new rules, both inbound and outbound entities operating in India will have a fair bit of information to maintain and disclose, say tax experts.
The CbCR requirements are largely in line with BEPS Action Plan-13, with significant penalties in case of violations of the provisions, they added.
The Base Erosion and Profit Shifting (BEPS) measures were endorsed by G20 leaders in November 2015. The BEPS project had set out 15 key actions (of which CbCR is one, under Action Plan 13) to reform the international tax framework and ensure that profits are reported where economic activities are carried out and value created.
The OECD’s main objective of maintaining CbCR is to ensure that all relevant tax authorities have access to the same information about a multinational enterprise’s (MNE’s) group value chain and the resulting tax consequences. CbCR will cover information about which entities do business in a particular jurisdiction and the business activity each entity engages in. CbCR, which will be electronically transmitted between competent authorities, will assist tax administrators in having a complete understanding of the way in which MNEs structure their operations, by annually providing them with key information on the global allocation of incomes and taxes paid.
What the draft rules say There will now be a requirement of keeping a Master File for every constituent entity of an international group with a consolidated revenue of over ?500 crore as reflected in the consolidated financial statements (CFS) for the previous accounting year.
The second condition to be fulfilled is that the aggregate value of international transactions during the reporting accounting year should exceed ?50 crore or intangibles value exceeding ?10 crore.
For CbCR to kick in, the total consolidated revenue of the international group has been pegged at ?5,500 crore or more in the CFS of the preceding accounting year.
Expert views Simone Dias Musa, Chair, Global Tax Practice, Baker McKenzie, a global law firm, told BusinessLine recently that the G20 BEPS project has now moved into the implementation stage from the Action Plan phase.
India had already adopted country-by-country reporting under the BEPS 13 Action Plan and enacted legislation requiring reporting by MNEs, she said.
This CbCR stipulation for MNEs is very much in India's interest given that several multinationals have moved into India to establish services operations and shared service centres. “Having CbCR will show India is important in the international context of multinationals,” she said.
India, although not an OECD member, has been “very active” and “very aware” of what happens internationally on the income-tax front, said Simone.
Since the Vodafone case, India is on track on countering harmful tax practices that affect the country, she added.
Kunj Vaidya, Leader-Transfer Pricing, Pricewaterhouse & Co LLP, said there are additional reporting requirements and the threshold for Master File maintenance is quite low. This increases the burden on taxpayers significantly, he said.
Amit Agarwal, Partner-Transfer Pricing, Nangia & Co, said that the new rules are likely to provide tax authorities with substantial information resulting in a high level of transparency.
This increase in global transparency is likely to mean that deviations from a company’s transfer pricing policy or the implementation of that policy or economic inconsistencies will become more apparent to Indian tax authorities, thereby possibly resulting in higher transfer pricing litigation, Agarwal said.
Indian rules seem to require more data as compared to the OECD requirements, according to a PwC note.