Recommended FAQs on the three-tiered TP documentation requirements. January 2018

Transcription

1 Recommended FAQs on the three-tiered TP documentation requirements

2 Foreword At the outset, we would like to thank you for giving us the opportunity to provide our recommendations. We sincerely welcome the consultative approach adopted by the Government of India of accepting recommendations from stakeholders with respect to new policy measures and statutory amendments. This is clearly an inclusive and collaborative approach, and in line with best practices followed globally. We are sure that such an approach will help in further building trust and enhancing taxpayer confidence. We understand that India s involvement in OECD s Base Erosion and Profit Shifting (BEPS) project has been intensive. It has been involved in devising the Action Plans, and being part of various working groups, task forces and committees that were set up to examine the different aspects of the Action Plans. The G-20 countries (including India) formally endorsed the 15-item action plan, and have committed themselves to rapid, widespread and consistent implementation of BEPS measures. The immediate focus and priority is on minimum standards, one of them being BEPS Action 13, on transfer pricing (TP) documentation and countryby-country reporting (CbCR), i.e., the three tiered TP documentation. Accordingly, given India s commitment to implement the international consensus, Finance Act, 2016 understandably introduced the three tiered TP documentation requirements, followed by notification of the rules thereto vide amendment of the Income-tax Rules, 1962 (hereinafter collectively referred to as CbCR legislation ). We appreciate that the requirements are largely in line with the final report on BEPS Action 13 (hereinafter referred to as Action 13 report ). However, given that this is the first year of implementation of the CbCR legislation, entities which fall within the ambit of the requirements put forth by this legislation (hereinafter referred to as covered entities ) are bound to have several questions and will also require a variety of clarifications. In fact, since the introduction of the CbCR legislation, we have, over the last few months, had various interactions with several covered entities (especially the outbound ones, i.e., where the ultimate parent entity resides in India) and there are some areas where there exist ambiguities, and some others where they believe there could be hardships. Also, most covered entities are hoping that some flexibility will be allowed in the way the obligations under the CbCR legislation are required to be met. Based on our own analysis of the new Indian law as it stands today, global precedents prevailing in this regard, and after duly considering the views of some of the covered entities as mentioned above, we have put forth our humble recommendations with respect to the CbCR legislation. The recommendations are provided below for your kind perusal and consideration. The recommendations are in the form of Frequently Asked Questions (FAQs) which the Government of India may consider issuing for the sake of clarifying various matters. The FAQs and their recommended answers, along with the underlying rationale for the question / answer, are detailed below. Sanjay Tolia Vijay Mathur Kunj Vaidya India Markets and Senior Advisor India TP Leader Asia Pacific TP Leader Tax and Regulatory Services PwC Page 2 of 34

3 Table of contents 1. Scope and coverage of CbCRs 4 2. Master File GAAP reporting Filing obligation CbCR template Permanent establishments Confidentiality and use of data Miscellaneous aspects 28 Appendix A 30 Appendix B 32 Acknowledgements 34 PwC Page 3 of 34

4 1. Scope and coverage of CbCRs Question 1 - A When preparing a CbCR, which are the entities which are required to be included in the CbCR reporting? As per section 286 of the Income-tax Act, 1961 (the Act), a CbCR is required to be furnished for an international group. A group, as per definition, covers the parent entity and all other constituent entities in respect of which a consolidated financial statement (CFS) is / would be required to be prepared. Parent and constituent entities are also primarily defined by virtue of how they are placed / included in the CFS. Further, a CFS is defined as the financial statement of an international group in which the assets, liabilities, income, expenses and cash flows of the parent entity and the constituent entities are presented as those of a single economic entity. Therefore, entities whose assets, liabilities, income, expenses and cash flows are consolidated with the parent entity and presented as those of a single economic entity in the CFS will satisfy the definition of a constituent entity and will accordingly need to be reported in the CbCR. As per section 286 of the Act, a CbCR is required to be furnished for an international group. As per section 286(9)(e) of the Act, a group is defined as: a group includes a parent entity and all the entities in respect of which, for the reason of ownership or control, a consolidated financial statement for financial reporting purposes, (i) is required to be prepared under any law for the time being in force or the accounting standards of the country or territory of which the parent entity is resident; or (ii) would have been required to be prepared had the equity shares of any of the enterprises were listed on a stock exchange in the country or territory of which the parent entity is resident; Therefore, a group covers the parent entity and all other constituent entities in respect of which a consolidated financial statement (CFS) is / would be required to be prepared. Since a CbCR is required for the group, a follow-up question that may arise would be whether all entities included in the CFS also warrant inclusion in the CbCR? To answer this question, the definition of CFS itself becomes important. However, before that, since a group covers the parent entity and constituent entities the definitions of these terms are also relevant to consider. As per section 286(9)(h) of the Act, a parent entity has been defined to mean: a constituent entity, of an international group holding, directly or indirectly, an interest in one or more of the other constituent entities of the international group, such that, (i) it is required to prepare a consolidated financial statement under any law for the time being in force or the accounting standards of the country or territory of which the entity is resident; or (ii) it would have been required to prepare a consolidated financial statement had the equity shares of any of the enterprises were listed on a stock exchange, and, there is no other constituent entity of such group which, due to ownership of any interest, directly or indirectly, in the first mentioned constituent entity, is required to prepare a consolidated financial statement, under the circumstances referred to in clause (i) or clause (ii), that includes the separate financial statement of the first mentioned constituent entity Quite evidently, the fulcrum of the above definition is the requirement to prepare a CFS. A similar focus on CFS is also evident from the definition of constituent entity, which has been defined in section 286(9)(d) of Act to mean: (i) any separate entity of an international group that is included in the consolidated financial statement of the said group for financial reporting purposes, or may be so included for the said purpose, if the equity share of any entity of the international group were to be listed on a stock exchange; (ii) any such entity that is excluded from the consolidated financial statement of the international group solely on the basis of size or materiality; or PwC Page 4 of 34

5 (iii) any permanent establishment of any separate business entity of the international group included in clause (i) or clause (ii), if such business unit prepares a separate financial statement for such permanent establishment for financial reporting, regulatory, tax reporting or internal management control purposes. From the above definition, it is clear that the determination of an entity as a constituent entity would depend upon its inclusion in the CFS of the group prepared by the parent entity. However, this definition cannot be interpreted in isolation, i.e., without analyzing the definition of CFS. Since CFS is pivotal to the definitions of group, parent entity and constituent entity, it becomes important to examine the definition of CFS. The term consolidated financial statement has been defined in section 286(9)(f) of the Act as follows: the financial statement of an international group in which the assets, liabilities, income, expenses and cash flows of the parent entity and the constituent entities are presented as those of a single economic entity From a combined reading of the above definition of CFS and the definitions of group, parent entity and constituent entity, it is apparent that entities whose assets, liabilities, income, expenses and cash flows are consolidated with the parent entity and presented as those of a single economic entity in the CFS will satisfy the definition of a constituent entity and will accordingly need to be reported in the CbCR. It may be noted that even the OECD in its Guidance on the Implementation of Country-by-Country Reporting, November 2017 (OECD guidance) in Section III(3) emphasizes the need to focus on the following for determining membership of a group: - Principles / rules applied for consolidation - Presentation in consolidated financial statements under applicable accounting standards Clearly, the answers relating to identifying membership of a group lie in the mechanics of consolidation and the CFS itself. Question 1 - B What does presented as those of a single economic entity mean? Under the Single Economic Entity (SEE) concept, entities associated with each other by virtue of common control operate as a single economic unit and therefore their CFS should reflect the essence of such an arrangement. The CFS must be prepared as if the entire group of entities constitutes a single entity. A few points to be borne in mind in this regard are as follows: When reporting as a SEE, in order to avoid misinterpretation of the scale of a group s activities, it is necessary to eliminate the effects of any inter-company transactions and balances during consolidation, such as the following: (i) inter-company sales and purchases; (ii) inter-company payables and receivables; (iii) inter-company payments such as dividends, royalties and head office charges. Inter-company transactions must be eliminated as if the transactions had not occurred in the first place. Examples of adjustments that may be required to eliminate the effects of inter-company transactions include: (i) elimination of unrealized profit or loss on sale of assets to member companies of a group; (ii) elimination of excess or deficit depreciation expense in respect of fixed asset purchased from a member company at a price that was higher or lower than the net book value of the asset in the books of the seller. PwC Page 5 of 34

6 An example to demonstrate consolidation on the basis of a SEE concept is provided below: XYZ Ltd has a subsidiary, viz., DEF Ltd, and a summary of their financial results is as below: Particulars XYZ Ltd (INR mn) DEF Ltd (INR mn) Sales Cost of Sales (60) (20) Gross Profit Operating Expenses (20) (10) Includes 20 of sales to XYZ Ltd Includes 20 of purchases from DEF Ltd Net Profit When preparing the CFS of XYZ Group, an adjustment in respect of the inter-company sale and purchase will be required in order to conform to the SEE principle. CFS of XYZ Group will therefore be presented as follows: Particulars XYZ Ltd DEF Ltd Inter-company XYZ Group (INR mn) (INR mn) adjustment Sales (50-20) 150 Cost of Sales (60) (20) (60-20)+(20) (60) Gross Profit Operating Expenses (20) (10) (20)+(10) (30) Net Profit The presentation of CFS as described above, when viewed from an accounting perspective will have to be understood in light of the prevailing accounting standards (AS-21, 23, and 27, and Ind AS 27, 28 and 111) which govern consolidation of financial statements. In accounting parlance, an entity can be consolidated with a parent either on a line-by-line basis or an equity method basis. The existence of control governs the manner in which consolidation of financial statements is undertaken. This also emanates from the accounting standards (which define the term control in different situations): line-by-line (AS-21, 27 and Ind AS 27, 111); or equity method (AS 23, 27 and Ind AS 28, 111) Financial statements of an entity having different units is also presented similarly, i.e., eliminating impact of inter-unit transactions. Such units are also governed by the fundamental of common control and management, which also governs the SEE concept. Quite evidently, under the SEE concept a line-by-line consolidation is followed. A line-by-line consolidation of entities is triggered when the entities are governed by common control (and thus operate as a SEE). Under a line-by-line consolidation, the entity would be combined with its parent on a line-by-line basis by adding together like items of assets, liabilities, income and expenses. On the other hand, equity method of consolidation is followed where the investor has significant influence but does not have the ability to exercise control, and as such do not interact with each other as a SEE. Under the equity method of consolidation, investment in an entity is initially recognized at cost and adjusted thereafter for the post-investment change in the investor s share of net assets of the investee. The profit or loss of the investor includes the investors share of the profit or loss of the investee. The inter-company transactions are not eliminated. PwC Page 6 of 34

7 Under an equity method of consolidation, there will be no change in the profit and loss account of XYZ Ltd and DEF Ltd, which will continue to be represented as indicated above, and as reproduced below: Particulars XYZ Ltd (INR mn) DEF Ltd (INR mn) Sales Cost of Sales (60) (20) Gross Profit Operating Expenses (20) (10) Includes 20 of sales to XYZ Ltd Includes 20 of purchases from DEF Ltd Net Profit The effect of consolidation under the equity method will be reflected in the Balance Sheet of XYZ Ltd as follows (assuming it s the first year of DEF Ltd, and 20% of its share capital is held by XYZ Ltd, and there are no dividends declared by DEF Ltd): Particulars Asset (INR mn) Liabilities (INR mn) Initial investment Add: Increase in the value of investment (i.e., 20% of net profit of DEF Ltd, being XYZ Ltd s share) Total investment value Initial cash outflow on account of initial investment (100) Net profit of DEF Ltd added to Reserves of XYZ Ltd (representing the increase in the value of investment) + 4 Net overall impact on Balance Sheet In light of the definition of CFS in section 286(9)(f) of the Income-tax Act, 1961, the principles of consolidation, and the analysis of the SEE concept as discussed above, entities which are consolidated in a CFS on a line-by-line basis would satisfy the definition of a constituent entity and will accordingly need to be reported in a CbCR. PwC Page 7 of 34

8 Accordingly entities consolidated in CFS under equity method will not be covered under CbCR. The term single economic entity has neither been defined under the Act, nor in the Accounting Standards. Accordingly, with a view to prevent any ambiguity and to avoid any confusion as to the coverage of entities in a CbCR, it is worthwhile for the Indian Government to clarify on the lines above. Upon a reading of the definition of CFS, the emphasis seems to be on presentation of assets, liabilities, income, expenses and cash flows of the parent and constituent entities as those of a SEE. The element of control, which governs the SEE concept, also governs the manner in which consolidation of financial statements is undertaken, i.e., line-by-line or equity method. A line-by-line consolidation triggers where the parent entity is able to exercise control over the constituent entity. On the other hand, equity method is followed where the investor has significant influence but does not have the ability to exercise control, and as such do not interact with each other as a SEE. In this context, the table below puts forth the types of consolidation prescribed under the accounting standards for typical entity structures and thus forms the basis of the answers to the questions set forth above. Entity Applicable Accounting Standard Type of consolidation Subsidiary AS 21 / Ind AS 27 Line-by-line Associate AS 23 / Ind AS 28 Equity method Joint Venture AS 27 / Ind AS 111 Line-by-line (proportionate) Joint Venture AS 27 / Ind AS 111 Equity method (in specific cases) For a detailed evaluation of the types of consolidation prescribed under the accounting standards for typical entity structures, along with comments on their interplay with control, please refer to Appendix A and Appendix B. Question 2 If a constituent entity is a joint venture or a joint operation run by two or more partners, then which of the partners will be required to report such a joint venture / operation in its CbCR? This situation may be diagrammatically represented as follows: A Ltd. B Ltd. C Ltd. 33.3% 33.3% D Ltd. PwC Page 8 of 34

9 In case a constituent entity is a joint venture or a joint operation, one would need to evaluate the basis adopted for consolidating the results of this entity with that of the respective partners. In the above example, if A Ltd, B Ltd and C Ltd follow a proportionate line-by-line consolidation for reporting D Ltd s results in their respective consolidated financial statements, A Ltd, B Ltd and C Ltd, will be required to report D Ltd in their respective CbCRs to the extent of their respective shares (i.e. 33.3%). D Ltd would be covered by the definition of CFS under section 286(9)(f) of the Income-tax Act, 1961 (the Act). However, in an event where A Ltd, B Ltd and C Ltd use equity method of accounting for reporting D Ltd s results in their respective consolidated financial statements, A Ltd, B Ltd and C Ltd would not be required to report D Ltd in their respective CbCRs. Further, if proportionate line-by-line consolidation is applied, then the pro rata share of D Ltd s total revenue should be taken into account when applying the prescribed threshold for A Ltd, B Ltd and C Ltd for the purposes of section 286(7) of the Act. In such a case, even the financial data of D Ltd that is included in the CbCR of A Ltd, B Ltd, and C Ltd should represent the corresponding pro-rated amounts. The answer above is in line with the single economic entity concept, the definition of consolidated financial statements, and the consolidation principles (as per the prevailing accounting standards) followed with respect to joint ventures / joint operations (as laid out in the Appendix). It is also in line with section III(5) of the OECD guidance. Question 3 If, in a constituent entity, unrelated parties hold minority interests then, for the purpose of computing the consolidated group revenue to measure against Euro 750 Million threshold (or the near INR equivalent as prescribed) should the consolidated group revenue include 100 percent of the constituent entity s revenue or should it be pro-rated for the minority interest component? Further, should the financial data for this entity that is required to be included in the CbCR be pro-rated or reported 100 per cent? If, as per the presentation in the CFS under applicable accounting standards, the constituent entity is required to be fully consolidated (i.e., not on a proportionate basis), then 100 percent of this entity s revenue should be considered for the purpose of applying the consolidated group revenue threshold. In such a case, even the financial data of this entity that is included in the CbCR should represent 100 percent amounts, and should not be pro-rated. In contrast, the answer would be to pro-rate, if as per the presentation in the CFS under applicable accounting standards, the constituent entity is required to be consolidated on a proportionate basis. This is in line with the OECD guidance in Section III(4). PwC Page 9 of 34

10 Question 4 What would be the definition of revenue for the purpose of computing the consolidated group revenue to measure against Euro 750 million threshold (or the near INR equivalent as prescribed)? All of the revenue as reflected (or would be reflected) in the CFS should be considered. The revenue should be considered on either gross or net basis, depending upon how it is reflected in the CFS. The revenue shall include extraordinary income and gains from investment activities. Further, comprehensive income/earnings, revaluations, and/or unrealized gains reflected in net assets and the equity section of the balance sheet should not be reported as Revenue. This is in line with the OECD guidance in section IV(2) and section II (1.1 and 1.2). PwC Page 10 of 34

11 2. Master File Question 5 In a case where an MNE group operates diversified businesses (for example, pharmaceuticals, chemicals, and automobiles), and the Indian constituent entity of such MNE group operates only in one of the business segments (say, pharmaceuticals) can it file an abridged Master File for the relevant business only (i.e., pharmaceuticals)? Yes, it can file an abridged Master File for the relevant business only (i.e., pharmaceuticals as in the above example). Information on businesses which are not carried out in India will not be relevant. Question 6 Rule 10DA(1)(c)(VIII) of the Income-tax Rules, 1962, requires that the Master File provides a description of the functions performed, assets employed and risks assumed by constituent entities (CEs) of the international group that contribute to at least 10 percent of revenues or assets or profits of such group. What should be the definition of revenues, assets and profits for the purpose of this computation? The definition of revenue should be the same as is considered for the purpose of computing the consolidated group revenue to measure against Euro 750 million threshold (or the near INR equivalent, as prescribed). Profits should be the PBT [i.e., profit (loss) before income-tax] as represented in the consolidated financial statements. Assets should be total assets in the Balance Sheet (i.e., the balance sheet total) of the consolidated financial statements. Definitions which are consistent with definitions used for CbCR purposes/ CbCR reporting and those which are derived from the consolidated financial statements of the group will avoid ambiguity. PwC Page 11 of 34

12 Question 7 The term intangible property has not been defined in Rule 10DA of the Income-tax Rules, However, intangible property has been defined in the Explanation to section 92B of the Income-tax Act, Will such definition also apply for purposes of Rule 10DA of the Income-tax Rules, 1962? Yes, the same definition will apply. This clarification will ensure that the interpretation of intangible property for section 92B purposes is aligned with that for Rule 10DA purposes. PwC Page 12 of 34

13 3. GAAP reporting Question 8 CbCR will report financial data of different countries. How would differences arising on account of the parameters mentioned below be reconciled when reporting CbCR data for an international group having an Indian parent: Generally Accepted Accounting Principles (GAAP) Currency Accounting year GAAP, currency and accounting year applied by an Indian parent entity in preparing the consolidated financial statements (CFS) shall form the basis for reporting CbCR data in Part A of Form No. 3CEAD. Accordingly, it is clarified that it is not necessary to reconcile all CbCR data with the standalone financial statements of the constituent entities prepared as per the GAAP of the respective jurisdictions. CbCR reporting should not lead to the establishment of different reporting standards and rules. Therefore, to keep matters simple and to not increase the compliance burden on covered entities, the principles of consolidation accounting should equally apply to CbCR reporting. Question 9 CbCR will report financial data of different countries. How would differences arising on account of related party definitions be reconciled when reporting CbCR data for an international group having an Indian parent. The term related parties appearing in the third column of Part A of Form No. 3CEAD should be interpreted as constituent entities listed in Part B of Form No. 3CEAD. This is in line with section II(2) of the OECD guidance. PwC Page 13 of 34

14 4. Filing obligation Question 10 - A In which circumstances would Indian constituent entity/ies of an international group whose parent entity is not resident in India, be required to file CbCR in India? The Indian constituent entity will be required to file CbCR in India in the following circumstances: - The parent entity of an international group is a resident of a country in which CbCR requirement has been enacted or enforced, but there is no agreement for exchange of CbCR between India and the parent entity s jurisdiction, or where there has been a systemic failure. In addition: o there is no alternate reporting entity nominated with respect to such international group, or o there is an alternate reporting entity nominated with respect to such international group however, the alternate reporting entity has not filed the CbCR in its jurisdiction before the due date specified in section 286(2) of the Income-tax Act, 1961, or o there is an alternate reporting entity nominated with respect to such international group, and the alternate reporting entity has filed the CbCR in its jurisdiction before the due date specified in section 286(2) of the Income-tax Act, 1961 however, there is no agreement for exchange of CbCR between India and the alternate reporting entity s jurisdiction. This is based on a reading of section 286(4) and section 286(5) of the Income-tax Act, Further, an Indian constituent entity, as described in the question above, would in all likelihood not have access to and is also unlikely to be given access to the worldwide information of an international group, as is required to be reported in the CbCR. Therefore, practically speaking, the requirement to file CbCR by the above mentioned Indian constituent entity may not be feasible and thus warranting an exemption. PwC Page 14 of 34

15 Question 10 - B Where there is no agreement for exchange of CbCR between India and the parent entity s jurisdiction, and the Indian constituent entity/ies of the international group are required to file CbCR in India, what would be the due date for filing the CbCR? The due date for filing the CbCR shall be 30 days after the due date of filing CbCR by the parent entity in its jurisdiction. If the agreement for exchange of CbCR between India and the parent entity s jurisdiction is signed before such due date the obligation on the Indian constituent entity/ies to file a CbCR will cease. Rule 10DB(4) of the Income-tax Rules, 1962, states as follows: A constituent entity of an international group, resident in India, other than the entity referred to in sub-rule (3), shall furnish the report referred to in sub-rule (3) within the time specified therein if the provisions of sub-section (4) of Section 286 are applicable in its case. This rule refers to the time specified in sub-rule (3) of Rule 10DB. However, sub-rule (3) does not specify any timeline, and neither does section 286(4) of the Income-tax Act, 1961 (the Act). Accordingly, clarity on this aspect is required such that the timelines for CbCR filing requirement for inbound groups is linked to the provisions of section 286(4) of the Act this is because the CbCR filing requirements for international groups having parent entity resident outside India is contingent to the provisions of section 286(4) of the Act. Moreover, practically speaking, the CbCR shall be available for filing by the Indian constituent entity/ies only once it has been prepared for filing by the parent entity in its jurisdiction. Further, Indian constituent entity/ies must as far as possible await the signing of the agreement for exchange of CbCR between India and the parent entity s jurisdiction. Question 10 - C Where there is no agreement for exchange of CbCR between India and the parent entity s jurisdiction, and there are multiple Indian constituent entities of the international group which are required to file CbCR in India, what would be the due date for filing the intimation in Form No. 3CEAE? The due date for filing the intimation in Form No. 3CEAE shall be any day after the due date of filing CbCR by the parent entity in its jurisdiction, but before the due date for filing the CbCR by the Indian constituent entity/ies of the international group. Rule 10DB of the Income-tax Rules, 1962 does not prescribe a due date for filing the intimation in Form No. 3CEAE. Thus, clarity is required in this regard. Indian constituent entity/ies must as far as possible await the signing of the agreement for exchange of CbCR between India and the parent entity s jurisdiction. If the agreement for exchange of CbCR between India and the parent entity s jurisdiction is signed before the due date of filing CbCR the obligation on the Indian constituent entity/ies to file a CbCR will cease. Accordingly, an intimation in Form No. 3CEAE would also not be required then. Therefore, the due date for filing the intimation should as far as possible be close to the due date of filing the CbCR. PwC Page 15 of 34

16 Question 10 - D Where there has been a systemic failure, and the Indian constituent entity/ies of the international group are required to file CbCR in India, what would be the due date for filing the CbCR? Further, in such a situation, if there are multiple Indian constituent entities of the international group which are required to file CbCR in India, what would be the due date for filing the intimation in Form No. 3CEAE? Once the systemic failure has been intimated to the Indian constituent entity/ies of the international group by the prescribed authority, then, this situation would be deemed to be akin to the situation where there is no agreement for exchange of CbCR between India and the parent entity s jurisdiction. Accordingly, the due date for filing the CbCR and the due date for filing the intimation in Form No. 3CEAE as are applicable in the latter situation, shall also be applicable in case of the former situation. Same as the for s to Questions 10 - B and 10 - C above. Question 11 Several countries have established their own thresholds for CbCR filings (which could differ from the Euro 750 million threshold). This could lead to situations where CbCR filing may be required in India but not in the other jurisdiction. In such situations, would the Indian constituent entity be required to file the CbCR if the consolidated turnover of the international group of which it is a part is lesser than the turnover threshold prescribed by the jurisdiction of the parent entity (and hence, the parent is not required to file CbCR in its jurisdiction)? No, in such cases the Indian constituent entity will be exempt from such a requirement. Whether a CbCR must be prepared and filed, should, at the outset, be determined based on whether the international group crosses the prescribed threshold in the parent entity s jurisdiction, and not from the perspective of thresholds established in the local jurisdictions of other constituent entities. This will facilitate effective implementation and administration of the CbCR obligations of the international group. Further, an Indian constituent entity, as described in the question above, would in all likelihood also not have access to and is also unlikely to be given access to the worldwide information of an international group, as is required to be reported in the CbCR. Therefore, practically speaking, the requirement to file CbCR by the above mentioned Indian constituent entity may not be feasible and thus warranting an exemption. For example, Japan has prescribed a limit of JPY 100 billion which would be approx. INR 5,880 crores for filing a CbCR. Whereas, India has prescribed a limit of Euro 750 million which would be approx. INR 5,611 crores for filing a CbCR. In such an event, a Japanese MNE having a turnover of INR 5,700 crores would not be required to file a CbCR in Japan. And accordingly, the Indian constituent entity of such a Japanese MNE would also not be required to file a CbCR in India. It may be noted, the exemption envisaged above is in line with the regulations in respect of CbCR proposed by the Internal Revenue Service (IRS) of the United States of America (as per Internal Revenue Service, 26 CFR Part 1, [REG ], RIN 1545-BM70, Country-by-Country Reporting), and subsequently adopted by a Treasury Decision (TD 9773) and as laid out under the sub-heading Reporting Threshold. Further, it is also in line with section IV(1) and IV(2) of the OECD guidance. PwC Page 16 of 34

17 Question 12 If the preceding accounting year of the parent entity of an international group is shorter than 12 months, then how should it be determined whether or not the group has a CbCR filing obligation? For the purpose of applying the CbCR applicability revenue threshold (i.e., the near INR equivalent of Euro 750 million), the actual total consolidated group revenue as reflected in the consolidated financial statements for the short accounting period should be considered. A pro-rata adjustment should not be made to either the total consolidated group revenue for the short accounting period, or to CbCR applicability revenue threshold. For example, if one has to assess CbCR applicability for Year 2, then the total consolidated group revenue of Year 1 should be evaluated against the CbCR applicability revenue threshold. Having said that, if the actual total consolidated group revenue as reflected in the consolidated financial statements is INR 4,000 million for the preceding accounting year, i.e., preceding short accounting period (say Year 1); and the prescribed threshold is say INR 5,500 million then, CbCR requirements will not apply for Year 2. In such a situation, INR 4,000 million and/ or INR 5,500 million should not be subjected to any pro-rata adjustment. This is in line with section IV(3)(3.2) of the OECD guidance. Question 13 When in a given year there are changes in ownership due to mergers/ acquisitions / demergers, how is the CbCR filing obligation for that given year affected and what information should be reported in the CbCR? For the year in which a merger/acquisition/demerger occurs, the determination of whether or not a Group has CbCR filing obligation for such year (Year 1 or Y1), shall be based on the Group's total consolidated group revenue (CGR) as reflected in the consolidated financial statements (CFS) of the Group for the preceding accounting year (Year 0 or Y0). The CbCR data for Y1 for the said group will be derived from the group s CFS for Y1 (i.e., the accounting principles / standards followed for preparing the CFS for the group during Y1 shall also govern CbCR data reporting). The application of these principles can be best explained by means of examples as provided below. In all these examples, it has been assumed that: the fiscal year is the calendar year; the groups under consideration are required to prepare CFS in Y0 and Y1, and the respective parent entities of the groups under consideration remain unchanged in both years. PwC Page 17 of 34

18 Example 1: Fact pattern: A group of entities is acquired by B group of entities during Y1. As a result of the acquisition, B group now becomes B-new group (having the same parent entity as B group). Impact on CbCR filing obligation data to be reported in CbCR: If A group s CGR in Y0 crosses the CbCR applicability revenue threshold ( the threshold ), then A Group will be required to prepare CbCR for Y1, otherwise not. The CbCR data for Y1 for A group will be derived from A group s CFS for Y1 (i.e., the accounting principles / standards followed for preparing the CFS for A group during Y1 shall also govern CbCR data reporting). If B group s CGR in Y0 crosses the threshold, then B-new Group will be required to prepare CbCR for Y1, otherwise not. The CbCR data for Y1 for B-new group will be derived from B-new group s CFS for Y1 (i.e., the accounting principles / standards followed for preparing the CFS for B-new group during Y1 shall also govern CbCR data reporting). Example 2: Fact pattern: During Y1, i.e., in July of Y1, A group of entities sells a sub-group of its own entities. This sub-group of entities becomes B group. Impact on CbCR filing obligation data to be reported in CbCR: If A group s CGR in Y0 crosses the threshold, then A Group will be required to prepare CbCR for Y1, otherwise not. The CbCR data for Y1 for A group will be derived from A group s CFS for Y1 (i.e., the accounting principles / standards followed for preparing the CFS for A group during Y1 shall also govern CbCR data reporting). Since B group did not exist in Y0, there will be no CbCR obligation on B group for Y1. The CbCR obligation for B group shall be evaluated in Year 2 (Y2). If B group s CGR in Y1 (July to December) crosses the threshold, then B Group will be required to prepare CbCR for Y2, otherwise not. Example 3: Fact pattern: During Y1, A group of entities sells a sub-group of its own entities to B group. As a result of the sale, B group now becomes B-new group (having the same parent entity as B group). Impact on CbCR filing obligation data to be reported in CbCR: If A group s CGR in Y0 crosses the threshold, then A Group will be required to prepare CbCR for Y1, otherwise not. The CbCR data for Y1 for A group will be derived from A group s CFS for Y1 (i.e., the accounting principles / standards followed for preparing the CFS for A group during Y1 shall also govern CbCR data reporting). If B group s CGR in Y0 crosses the threshold, then B-new Group will be required to prepare CbCR for Y1, otherwise not. The CbCR data for Y1 for B-new group will be derived from B-new group s CFS for Y1 (i.e., the accounting principles / standards followed for preparing the CFS for B-new group during Y1 shall also govern CbCR data reporting). This is in line with the section VI(1) of the OECD guidance. PwC Page 18 of 34

19 Question 14 In case where an international group s parent entity, which is resident in India, is an unlisted company, but operates several diversified listed companies, operating different lines of businesses independently, can the said listed companies be deemed to be parent entities, and hence file their respective CbCRs, rather than one CbCR being filed by the unlisted parent entity? Yes, this may be possible particularly if the total consolidated group revenue of the above mentioned deemed parent entities exceeds the threshold prescribed in Rule 10DB(6) of the Income-tax Rules, However, any such option can be exercised only after obtaining a specific approval in this regard from the designated revenue authority. Providing such an option will ease compliance with filing obligations for large international groups having parent entity and subsidiaries operating in different lines of businesses. PwC Page 19 of 34

20 5. CbCR template Question 15 The CbCR template, as provided in the Action 13 report, requires information to be reported for constituent entities resident in a tax jurisdiction. The residency rules prevailing in different jurisdictions may vary. To identify whether or not a particular entity is a resident of a particular jurisdiction, would it be acceptable to apply the residency tests as per the law in force in the respective jurisdictions? Yes, that would be acceptable. However, in case an entity is a resident of two jurisdictions, then the tiebreaker test in the treaty between these two jurisdictions will need to be applied and will be the deciding factor. Application of the residency tests as per the law in force in the respective jurisdictions would be the most rationale way to deal with this matter, as any other alternative such as drawing up a separate test for residency for CbCR purposes or using the residency test in force in one jurisdiction for all other jurisdictions, would lead to a great deal of confusion and ambiguity in implementation. Question 16 Part A of Form No. 3CEAD requires reporting of various financial line items. Apart from the specific instructions provided at the end of the said form, kindly clarify other aspects from an exclusion / inclusion standpoint when reporting the various financial line items. Clarifications on the various financial line items required to be reported in Part A of Form No. 3CEAD are provided below: a) Revenue All revenue, gains, income, or other inflows shown in the financial statement prepared in accordance with the applicable accounting rules relating to profit and loss, such as the income statement or profit and loss statement, should be reported as Revenue. This will include extraordinary income and gains from investment activities. Only dividends earned from constituent entities should be excluded. Further, comprehensive income/earnings, revaluations, and/or unrealized gains reflected in net assets and the equity section of the balance sheet should not be reported as Revenue. : This answer is largely in line with instructions provided in the Action 13 report (Annexure III, Section C) with respect to Table 1. It is also in line with section II (1.1 and 1.2) of the OECD guidance. b) Stated capital Items considered as capital for the purpose of preparing CFS shall be treated as stated capital for the respective jurisdictions. : The definition of capital adopted for CFS will avoid any ambiguity. PwC Page 20 of 34

21 c) Profit / Loss before income-tax (PBT) This will be the PBT for respective jurisdictions as considered for the purpose of preparing CFS. Dividends earned from constituent entities should be excluded from the PBT (because they have also been excluded from Revenue ). : The definition of PBT adopted for CFS will avoid any ambiguity. d) Income tax (accrued) shall be tax payable for the relevant fiscal year based on the income-tax computation of the respective jurisdiction. : This answer will clarify and simplify, and is largely in line with the instructions provided in the Action 13 report (Annexure III, Section C) with respect to Table 1, and is also largely in line with section II(4.1) of the OECD guidance. e) Income tax (paid) shall be taxes actually paid during the relevant fiscal year for the respective jurisdiction. This will be net of income tax refunds received during the relevant fiscal year. This will include advance payments fulfilling the relevant fiscal year s tax obligation and also payments fulfilling the previous year s tax obligation. Taxes paid shall be: - Taxes paid by a constituent entity to the residence tax jurisdiction. - Withholding taxes paid by other entities (related and unrelated) with respect to payments to the constituent entity. Thus, if company A resident in tax jurisdiction A earns interest in tax jurisdiction B, the tax withheld in tax jurisdiction B should be reported as part of taxes paid by company A in tax jurisdiction A. : This answer will clarify and simplify, and is largely in line with the instructions provided in the Action 13 report (Annexure III, Section C) with respect to Table 1, and is also largely in line with section II(4.1 and 4.2) of the OECD guidance. Accumulated earnings This will be the accumulated earnings (reserves) for respective jurisdictions as considered for the purpose of preparing CFS. If a constituent entity reports a negative figure for accumulated earnings in its financial statements, then the negative figure should be reported in Part A of Form No. 3CEAD without modification. Where there are two or more constituent entities in the same jurisdiction, the negative figures for accumulated earnings, if there are any, should be netted off with the positive figures for accumulated earnings. In such a case, taxpayers should provide the following statement in Part C of Form No. 3CEAD: "Accumulated earnings include negative figures for jurisdiction.. : The definition of accumulated earnings (reserves) adopted for CFS will avoid any ambiguity. Further, with respect to negative earnings the above answer is in line with section II(6) of the OECD guidance. f) Number of employees The total number of employees employed on a full-time equivalent (FTE) basis should be reported herein, and these shall be: - employees on payroll (including seconded employees); - contractual workforce working on a full time basis; and - full time consultants The average employment levels during the year should be considered for the purpose of reporting. The average should be computed based on the opening and closing balances for the relevant year. PwC Page 21 of 34

22 Further, the number of employees working on contract basis (included above) shall be excluded from the CbCR of the contractor. : This answer is largely in line with the instructions provided in the Action 13 report (Annexure III, Section C) with respect to Table 1. g) Tangible assets other than cash and cash equivalents When reporting this line item, the following prevailing accounting standards: - cash will comprise cash on hand and demand deposits; and - cash equivalents will be short-term, high liquid investments that are readily convertible to known amounts of cash and which are subject to an insignificant risk of change in value. : In order to avoid any ambiguity on what cash and cash equivalents would include it is recommended that prevailing accounting standards be followed (i.e., AS 3 and Ind AS 7) as that would ensure at least a broad level of consistency in reporting. Question 17 If there is more than one constituent entity in a jurisdiction, should the aggregated data be reported or should the data that is reported for the jurisdiction consist of consolidated data which eliminates intra-jurisdiction transactions between constituent entities in that jurisdiction? The data should be reported on an aggregate basis. Intra-jurisdiction transactions between constituent entities in that jurisdiction should not be eliminated. This is in line with section II(3) of the OECD guidance, and also in line with the guidance published by the Inland Revenue Authority of Singapore on CbCR in July 2017 (FAQ No. 6), as well as the FAQs published by the Internal Revenue Service (IRS) of the United States of America on CbCR (FAQ No. D7, as per IRS website updated on 2 Nov, 2017). PwC Page 22 of 34

23 6. Permanent establishments Question 18 How should data regarding a permanent establishment (PE) be reported? Data of an admitted PE should be reported with reference to the tax jurisdiction in which the PE is situated and not with reference to the tax jurisdiction of the entity of which the PE is a part. For example, if an Indian parent entity has an admitted PE in UK, then, under the same CbCR, while reporting data for India, data for the UK PE should be excluded; and the data for UK PE should be included while reporting data for UK. However, if the existence of a PE is being contested, then no data needs to be reported but a note in this regard should be provided in the CbCR. There currently exists ambiguity on PE data reporting, and an answer on the above lines, besides being largely consistent with the Action 13 report, provides a cogent and reasonable approach. Question 19 If an Indian company carries out business in other countries only through PEs (say branches), will such an Indian company be required to file a Master File and/ or Local File? Such an Indian company will not be required to file a Master File and/ or a Local File. The Local Files maintained by the PEs (say branches) in their respective tax jurisdictions may be called for, if required. The Indian company may prepare a Master File if required by the regulations of the PEs tax jurisdictions. Section 92D(1) of the Income-tax Act, 1961 (the Act), and the proviso thereto read as follows: Every person who has entered into an international transaction or specified domestic transaction shall keep and maintain such information and document in respect thereof, as may be prescribed. Provided that the person, being a constituent entity of an international group, shall also keep and maintain such information and document in respect of an international group as may be prescribed. Section 92D(1) refers to Rule 10D documentation (presumably the Local File), and is applicable only to a person who has entered into an international transaction. Further, the proviso refers to the Master File, which is clearly applicable to a person who has entered into an international transaction and is a constituent entity of an international group. In the instant case, the Indian company is a constituent entity of an international group, but has not entered into any international transaction. This is because any transaction between the Indian company and its PEs (say branches) will not be international transactions as the PEs (say branches) of the Indian company will be considered to be residents for India tax purposes, and thus such transactions will not fall under the definition of an international transaction under section 92B of the Act. Accordingly, section 92D(1) of the Act and the proviso thereto will not apply to the Indian company. PwC Page 23 of 34

24 Question 20 In case an Indian company carries out business in other countries only through PEs (say branches), will such an Indian company be required to file a CbCR? Yes, such an Indian company will be required to file a CbCR if the prescribed consolidated group revenue threshold is met. This is despite there being no requirement, in such cases, for a Master File and/ or a Local File. Such an Indian company though operating only through PEs will qualify as an international group. This is apparent from the definition of an international group under Section 286(9)(g)(ii) of the Act, which reads as follows: international group means any group that includes,- (i) two or more enterprises which are resident of different countries or territories; or (ii) an enterprise, being a resident of one country or territory, which carries on any business through a permanent establishment in other countries or territories; PwC Page 24 of 34