Transfer pricing once again comes to the fore for MNCs
October, 31st 2017
Aligning the Indian tax environment with global best practices and standards, the Central Board of Direct Taxes (CBDT) has yet again brought a change to transfer pricing documentation.
Aligning the Indian tax environment with global best practices and standards, the Central Board of Direct Taxes (CBDT) has yet again brought a change to transfer pricing documentation. Detailed transfer pricing rules have been issued for public discussions, which require MNCs operating in India to furnish documentation with respect to their worldwide operations, popularly known as Country-by-Country Reporting (CbCR) and Master File.
Who stands impacted? The draft rules primarily deal with documentation requirements for domestic MNCs and subsidiaries of international MNCs operating in India. Going forward, these corporates will have to maintain two sets of documentation, i.e. the Master File and CbCR, if they meet the thresholds of turnover or international transactions. The CbCR is required to be maintained by domestic MNCs operating in India having a consolidated group revenue of Rs 5,500 crore or more, in the preceding accounting year. The requirements to prepare Master File shall apply to both domestic MNC groups and to subsidiaries of foreign MNCs operating in India, having a consolidated group turnover of over Rs 500 crore and satisfaction of either of the two conditions, i.e. (1) the international related party transactions of the entity exceeds Rs 50 crore, or (2) its intangible related transaction exceeds `10 crore.
How does it change the compliance burden?
The CbCR is required to be presented in a tabular format, setting out crisp information about the functions performed, assets owned, personnel employed, revenue generated, profits earned, taxes paid, capital structure, retained earnings, etc, with respect to each entity of the MNC group located in different countries. The Master File is expected to contain a blueprint of an MNC group’s global business model, specifically covering aspects such as organisational structure, description of various businesses, intangibles used in businesses, inter-company financial transactions, and financial and tax positions.
What are the deadlines?
The group parent entity in India is required to maintain a detailed CbCR and file the same by November 30 of the following year. Thus, for FY2016-17, the due date of filing the CbCR shall be November 30, 2017. The Indian subsidiary shall be required to maintain a Master File and furnish the same by the due date for filing return of income. However, for FY2016-17, the due date has been extended till March 31, 2018.
How this impacts domestic MNCs?
Given the threshold of Rs 500 crore for the preparation of a Master File, a lot of relatively small and mid-sized companies are likely to get impacted by this new development. This could possibly also result in situations requiring international groups to prepare a Master File only for India, since some of them may not actually have any such requirement under the laws of their respective countries. The preparation of a Master File shall require significant resources and careful planning on part of the management. Interestingly, even domestic MNCs that do not meet the thresholds of preparation of a Master File shall be required to file limited information in Part-A of the prescribed Form 3CEBA by the due date.
What is the immediate to-do for domestic MNCs?
Both the Master File and CbCR have relevance for the ultimate parent of the MNC. Thus, domestic MNCs need to gear up as the requirement for compliance has already commenced effective April 1, 2016. It is critical for MNCs to carry out a clinical analysis of their businesses at the earliest to find out whether there are any exposures in terms of mismatches between reported tax and business positions, value drivers, functions, rewards and risks, which might not have been detected during the course of normal local transfer pricing documentations carried out thus far, and take corrective measures with respect to supply chain models, as the new regulations get enacted.