The Indian Transfer Pricing (TP) scenario is ever evolving. The most recent being the proposal to introduce Country-by-Country (CbC) and Master File reporting requirements in the Union Budget, presented on February 29, 2016. The reporting requirements are in lines similar to those proposed in Base Erosion and Profit Shifting (BEPS) Action Plan 13, set forth by the Organization for Economic Co-operation and Development (OECD), along with G20 nations.
As a background, OECD released 15 action points last year, aiming to curb profit shifting practices, perceived to be undertaken by Multi National Companies (MNCs). These 15 action points are considered to be one of the most fundamental changes in the international tax arena.
CbC reporting, along with master file reporting, is proposed to be made applicable to an international group having an Indian parent from assessment year 2017-18 (financial year 2016-17) onwards. Due date for reporting is aligned with the due date for tax return filing, which is November 30 of the assessment year. As such, first filing will be due on November 30, 2017.
It is important to note that CbC and master file reporting is an additional compliance requirement, over and above what is currently required. Till now companies were required to comply with preparation of TP local documentation and accountant’s report in Form 3CEB. However, from financial year 2016-17 onwards, companies would be required to comply with CbC, master file, local TP documentation, and accountant’s report in Form 3CEB.
CbC reporting, for an international group having Indian parent, for the previous year 2016-17, shall apply, only if the consolidated revenue of the international group in previous year 2015-16 exceeds 750 million euros equivalent in local currency (R5,395 crore at current rate). A penalty of sum of R5,00,000 is proposed for non-furnishing of master file and providing inaccurate information in CbC report (each), and graded penalty ranging from R5,000-R50,000 per day is proposed for non-furnishing of CbC report.
The best bet in such ever evolving regulatory environment, is a technology flexible enough to seamlessly integrate CbC and master file compliance requirements, along with the existing TP local documentation. MNCs could leverage on technology platforms to standardised global tax data collection process, and enabling them to document and defend their results to revenue authorities. With technology, MNCs could maintain centralised documentation in one place and could compile CbC and master files themselves (in-house).
Technology could assist MNCs in reducing the risk involved in manual manipulation of data collection process, replacing it with repeatable data collection process against multiple sources (tax returns, ledgers, trial balances, etc.), and could bring in control and flexibility to leverage and validate data files and generating comprehensive CbC and master reports year on year, along with powerful internal review capabilities.
MNCs could leverage on technology not only from a compliance perspective, but also from a strategic planning perspective. Technology could assist MNCs in evaluating and analysing key ratios (e.g. profit before tax/employee ratio) which could help in identifying outliers or other areas where further documentation or discussions may be required. The analytics could help MNCs in proactively addressing concerns and discrepancies, ahead of inquiries from revenue authorities.
Maintaining centralised documentation, data management, global reporting, coupled with analytics will enable in-house compliance and / or a more efficient partnership with advisor(s).
Technology could also assist MNCs in keeping updated with the latest news and changes in BEPS regime around the world—with regard to BEPS incorporation in local tax regime, country specific thresholds, timelines, penalty provisions, etc.
It is imperative that MNCs understand and address the changing environment in the international tax and transfer pricing arena. As revenue officials are putting mechanism for increased transparency, MNCs should evaluate and meet compliance while addressing risk management too. Technology could impart holistic understanding and enhanced maturity on new tax paradigm.
Need of the hour, perhaps, is to utilise available TP technology to address the existing and upcoming regulatory risks arising due to CbC and master filing requirements. A centralised and efficient TP technology could assist in-house tax and management teams to foresee risks and mitigate them proactively, along with meeting compliance requirements.