Indian Tax Administration releases draft rules on Country-by-Country reporting and Master File implementation for public comment

Transcription

1 10 October 2017 Global Tax Alert News from Transfer Pricing Indian Tax Administration releases draft rules on Country-by-Country reporting and Master File implementation for public comment EY Global Tax Alert Library Access both online and pdf versions of all EY Global Tax Alerts. Copy into your web browser: Executive summary The Organisation for Economic Co-operation and Development (OECD) released its final report on Action 13 regarding Transfer Pricing (TP) Documentation and Country-by-Country (CbC) reporting, under its Base Erosion and Profit Shifting (BEPS) Action Plan, in October Action 13 recommended a three-tiered approach to TP documentation consisting of: A master file that provides tax administrations with high-level information regarding the global business operations and TP policies of a multinational enterprise (MNE) group A specific local file that provides the local tax administration with information regarding material related-party transactions, the amounts involved, and the company s analysis of the TP determinations they have made with regard to those transactions A CbC reporting template that includes information on the economic activity of the MNE group CbC reporting was agreed to as one of the minimum standards for implementing anti-beps measures. The Indian Government through Finance Act, 2016 amended the Indian tax law (ITL) to introduce provisions for additional TP documentation and CbC reporting to implement the recommendations contained in the OECD s BEPS report on

2 2 Global Tax Alert Transfer Pricing Action 13. These provisions were expected to be followed by detailed rules for implementation. Accordingly, on 6 October 2017, the Indian Tax Administration issued draft rules (Draft Rules) for CbC reporting and the furnishing of master file, for public comment, that can be sent electronically by 16 October Key highlights of the Draft Rules are: The contents of the master file and the CbC report are largely in line with the recommendations specified in Action 13 barring a few additional requirements for the master file. A monetary threshold, based on cumulative conditions of consolidated revenue and the value of international transactions, is prescribed for maintenance of the master file, while the threshold for CbC reporting is in line with the OECD recommendation. Filing of the master file and CbC reporting (including notification) would be made electronically in accordance with the specification to be prescribed by the designated authorities who are also responsible for evolving and implementing appropriate security, archival and retrieval policies. While the due date for the first year master file compliance i.e., financial year (FY) has been extended to 31 March 2018, the due date for filing of CbC reporting, remains 30 November However, given the practical challenges, it is expected that this deadline may be extended when the rules are finalized. This Alert provides an overview of the Draft Rules released for public comment including a summary of the ITL provisions with respect to the master file and CbC reporting. Detailed discussion Overview The OECD BEPS final report on Action 13 provided revised guidance on documentation and reporting as a replacement for the current content of Chapter V of the OECD TP Guidelines for MNEs and Tax Administrations. Action 13 report sets out a three-tiered standardized approach to TP documentation, which consists of a master file, a specific local file and a CbC reporting template. These three documents, taken together, will require taxpayers to articulate consistent TP positions and will provide tax administrations with useful information to assess TP risks. They will also help tax authorities in determining as to where audit resources can most effectively be deployed, and, in the event audits are called for, provide information to commence and target audit inquiries. CbC reporting was agreed to as one of the minimum standards for implementing anti-beps measures. Therefore, in order to achieve these objectives, the OECD recommended that countries adopt a standardized approach to TP documentation in their domestic tax legislations. Sections 92 to 92F of the ITL contain provisions relating to the TP regime. Section 92D of the ITL contains requirements for maintenance of prescribed information and documents relating to TP. Further, Rule 10D of the Indian transfer pricing rules provides for an exhaustive list of such documents that a taxpayer is expected to maintain. In response to the OECD s BEPS project recommendation, the Indian Government through Finance Act, 2016 amended the ITL to introduce provisions for additional TP documentation and CbC reporting to implement the guidance contained in Action 13. These provisions were expected to be followed by detailed rules for implementation. Thus, on 6 October 2017, the Indian Tax Administration issued Draft Rules for CbC reporting and furnishing of the master file, for public comment, which can be sent electronically by 16 October Master file In accordance with Action 13, the master file should provide an overview of the MNE group business, its overall TP policies, and its global allocation of income and economic activity in order to place the MNE group s TP practices in their global economic, legal, financial and tax context. The master file shall contain information which need not be restricted to the transaction undertaken by a particular constituent entity situated in particular country. In that aspect, information in the master file would be more comprehensive than typical current documentation standards. Taxpayers who are subject to master file compliance in India Under the ITL, as amended through Finance Act, 2016, entities that are constituents of an international group, shall be required to maintain such information and documents as prescribed (i.e., master file) in addition to the information related to the international transactions undertaken by such constituent entity in the contemporaneous local documentation. The Draft Rules provide that the master file requirements apply to every taxpayer, being a constituent entity of an international group, if the following two conditions are satisfied:

3 Global Tax Alert Transfer Pricing 3 The consolidated revenue of the international group, of which such taxpayer is a constituent entity, as reflected in the consolidated financial statement of the international group for the accounting year preceding such previous year, exceeds INR5 billion (approx. US$76.9 million) Either of the below transactional threshold is achieved for the reporting year: The aggregate value of international transactions as per the books of accounts maintained by the taxpayer exceeds INR500 million (approx. US$7.7 million) The purchase, sale, transfer, lease or use of intangible property (IP) as per the books of accounts maintained by the taxpayer exceeds INR100 million (approx. US$1.5 million) Upon meeting the above thresholds, each taxpayer, being a constituent entity of an international group resident in India, would be required to maintain the prescribed information and documents as part of the master file for annual compliance purposes. Details of information and documentation prescribed to be maintained In accordance with Action 13, the master file requires taxpayers to include information on operating entities, supply chain, overall strategy for IPs, description on group financing, general TP policies for financing arrangements, details of rulings and advance pricing agreements and information on the global TP policies, etc. The Indian Tax Administration has considered that the above guidance and the Draft Rules are largely in line with the contents as prescribed under Action 13 report. The Draft Rules, however, requires the following key additional information: Maintenance of a list of all the operating entities of the international group along with their addresses. This information does not form part of Action 13 report. A description of the functions performed, assets employed and risks assumed by the constituent entities of the international group that contribute at least 10% of the revenues, assets and profits of the group. The Action 13 report requires a brief written functional analysis describing the principal contributions to value creation by individual entities within the group. A list of all the entities of the international group engaged in development and management of intangibles along with their addresses. The Action 13 report requires a general description of location of principal research and development (R&D facilities and location of R&D management). A detailed description of the financing arrangements of the international group, including the names and addresses of the top 10 unrelated lenders. The Action 13 report requires a general description of group financing activities, including financing arrangements with unrelated lenders. In a number instances, the Draft rules require a detailed description, instead of a general description mentioned in the Action 13 report, particularly with respect to TP policies relating to R&D, IP, and financing arrangements. Format for maintenance of information and documents in the master file The Draft Rules prescribe a separate statutory form i.e., Form 3CEBA wherein each constituent entity should furnish the prescribed information and documents. Form 3CEBA is divided into two parts: Part A consists of name, address, the tax identification number (i.e., referred to as permanent account number or PAN) of the constituent entity resident in India, name and address of the international group, number of constituent entities of the international group operating in India along with its name, address and PAN. Part B consists of the contents as prescribed under Action 13 report and some additional information as mentioned above. The Draft Rules indicate that Form 3CEBA should be verified and signed by a designated person of the constituent entity. Filing procedures and filing due dates As per the Draft Rules, every constituent entity resident in India, shall furnish the information as contained under Part A of Form 3CEBA to the Director General of Income-tax (Risk Assessment) on or before the due date for furnishing the income tax return. This requirement is mandatory even if such constituent entity resident in India is not required to comply with the maintenance of master file requirements. Further, a constituent entity resident in India, which fulfils the consolidated revenue and transactional threshold as prescribed, would be required to furnish the information as contained under Part B of Form 3CEBA to meet the master file compliance obligation criteria. This form shall be furnished to the Director General of Income-tax (Risk Assessment) on or before the due date for furnishing the Income-tax return. However, in respect of the FY , the Draft Rules provide that the due date for furnishing master file in Form 3CEBA is 31 March 2018.

4 4 Global Tax Alert Transfer Pricing Further, in cases where there are more than one constituent entities resident in India of a foreign headquartered international group, the Draft Rules allow for a single filing by a designated constituent entity. Notification of the same needs to be filed in Form 3CEBE to the Director General of Income-tax (Risk Assessment) on or before 30 days prior to the due date for furnishing the master file in Form 3CEBA. Filing of master file in Form 3CEBA would be done electronically and the designated authorities shall specify the procedure for such online filings. Monetary penalty for non-maintenance and non-filing of master file Under the ITL, monetary penalties are applicable if the constituent entity fails to maintain and furnish the master file in Form 3CEBA within the due date unless the taxpayer is able demonstrate reasonable cause for such non-compliance. The prescribed sum of penalty is INR500,000 (approx. US$7,700). CbC reporting The Action 13 report provides for CbC reporting to be done separately from the master file and the local file. The CbC report will be helpful for high-level TP risk assessment purposes. Action 13 emphasizes that such information should not be used as a substitute for a detailed TP analysis based on a full functional and comparability analysis and so, it does not constitute conclusive evidence that transfer prices are or are not appropriate. MNEs who are subject to CbC reporting requirement According to the Draft Rules, CbC reporting requirements would apply to an international group for an accounting year, if the total consolidated group revenue, as reflected in the consolidated financial statement for the preceding accounting year exceeds INR55 billion (approx. US$846.1 million). The amount prescribed is consistent with the OECD recommendation of 750 million. Details of information and documentation prescribed to be furnished as part of CbC reporting Under Action 13, the CbC reporting template requires MNEs to report the amount of revenue, profits, income tax paid and accrued, employees, stated capital, retained earnings and tangible assets annually for each tax jurisdiction where they do business. In addition, MNEs are required to identify each entity within the group doing business in a particular tax jurisdiction and to provide an indication of the business activity each entity conducts. The CbC reporting template is divided into three tables: Table I. Overview of allocation of income, taxes and business activities by tax jurisdiction Table II. List of all Constituent Entities of the MNE group included in each aggregation by tax jurisdiction, including designation of Main Business Activity Table III. Additional Information The Draft Rules are largely in line with the above guidance and prescribe filing of the economic information of the international group as per above. However, the template prescribed by the Indian Tax Administration omits administrative, management or support services as one of sthe Main Business Activities in Table II. The definitions given under Draft Rules are in line with Action 13 report. Taxpayers who are subject to CbC reporting requirements in India Under the ITL, the CbC report filing requirements would arise in the case of the following entities: The parent entity of an international group (which has been defined to include two or more enterprises including a permanent establishment which are resident of different countries or territories), if it is resident in India An entity in India belonging to an international group, if the parent entity of the group is resident: In a country with which India does not have an arrangement for exchange of the CbC reporting Or Such country is not exchanging information with India even though there is an agreement; and this fact has been intimated to the constituent entity by the Indian tax administration The ITL also provides that if an international group, with a parent entity which is not resident in India, has designated an alternate entity for filing its report with the tax jurisdiction in which the alternate entity is resident, then the entities of such group operating in India would not be obliged to furnish a CbC report if the same can be obtained under the agreement of exchange of CbC reports by the Indian Tax Administration.

5 Global Tax Alert Transfer Pricing 5 CbC reporting notification requirements and filing due dates CbC reports should be filed in the jurisdiction of tax residence of the ultimate parent entity and shared between jurisdictions through the automatic exchange of CbC reporting information, pursuant to government-to-government mechanisms under the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, bilateral tax treaties or Tax Information Exchange Agreements. According to the Draft Rules, every constituent entity resident in India, if its parent entity is not a resident in India, would need to notify as to whether: It is the alternate reporting entity of the international group; or Provide the details of the parent entity or the alternate reporting entity, as the case may be, of the international group and the country or territory of which the said entities are residents. Such notification needs to be done in Form 3CEBB to the Director General of Income-tax (Risk Assessment) on or before 60 days prior to the due date for filing Income-tax return. As the due date for filing the tax return for the FY is 30 November 2017, the notification due date as per the Draft Rules would be 1 October It is expected that the Indian Tax Administration would consider providing an extension to the due date for the FY Filing of notification in Form 3CEBB would be done electronically and the designated authorities shall specify the procedure for such online notification. CbC report filing requirements and filing due dates According to the Draft Rules, every parent entity or the alternate reporting entity or a constituent entity (where there is a failure to exchange the CbC report/information) resident in India, should furnish the CbC report to the Director General of Income-tax (Risk Assessment) for every reporting accounting year. Such filing needs to be done in Form 3CEBC by the due date for filing the income tax return. It may be noted that for the FY , the due date would be 30 November In the case where there are more than one constituent entities of an international group resident in India, then Form 3CEBC may be furnished by that constituent entity by filing a separate notification in relation to such designation by the international group to furnish the said report with Director General of Income Tax (Risk Assessment) in Form 3CEBD. The reporting accounting year in such cases would be the financial year starting from 1 April and ending on 31 March of the following year. Filing of the CbC report in Form 3CEBC and notification in Form 3CEBD would be done electronically and the designated authorities shall specify the procedure for such online filing and notification. Monetary penalty for non-compliance Under the ITL, monetary penalties are applicable if the reporting entity fails to furnish or furnishes an inaccurate CbC reports within the due date unless the taxpayer is able demonstrate reasonable cause for such non-compliance. The prescribed sum of penalties are as follows: Event Non-filing of CbC report by Indian resident parent company or alternate resident company Not furnishing the information called for by the Indian tax authority within the given time limit Furnishing inaccurate details or non-filing of corrected report within 15 days Penalty INR5000 (approx. US$77) per day up to one month INR15000 (approx. US$230) per day beyond one month INR50,000 (approx. US$780) per day for continuing default after service of notice INR5000 (approx. US$77) per day up to service of penalty order INR50,000 (approx. US$780) per day for default beyond date of service of penalty order INR500,000 (approx. US$7,700) Data security of the information filed in the master file and CbC report The Draft Rules provide that the designated authorities will be responsible for developing and implementing appropriate security, archival and retrieval policies in relation to the information furnished under this rule.

6 6 Global Tax Alert Transfer Pricing Implications The much awaited draft of the Indian master file and CbC reporting rules released by the Indian Tax Administration are broadly in line with OECD guidance in Action 13. Although the rules are in draft stage, the draft provides an important and critical direction for developing sustainable processes and responsibilities with respect to the new reporting. Given this, the international groups should focus on the new reporting requirements and should assess readiness as to whether the necessary data is available, what must be done to ensure that data can be sourced and presented in an effective, efficient and clear manner and also analyze how tax authorities are likely to assess such information. Taxpayers will need to adopt a consistent and harmonized approach to preparing their master file and local files as well as CbC reporting and be prepared for a more detailed information or document requests during an audit. For additional information with respect to this Alert, please contact the following: Ernst & Young LLP (India), National International Tax Services Leader, Hyderabad Jayesh Sanghvi jayesh.sanghvi@in.ey.com Ernst & Young LLP (India), National Transfer Pricing Leader, New Delhi Vijay Iyer vijay.iyer@in.ey.com

7 EY Assurance Tax Transactions Advisory About EY EY is a global leader in assurance, tax, transaction and advisory services. The insights and quality services we deliver help build trust and confidence in the capital markets and in economies the world over. We develop outstanding leaders who team to deliver on our promises to all of our stakeholders. In so doing, we play a critical role in building a better working world for our people, for our clients and for our communities. EY refers to the global organization, and may refer to one or more, of the member firms of Ernst & Young Global Limited, each of which is a separate legal entity. Ernst & Young Global Limited, a UK company limited by guarantee, does not provide services to clients. For more information about our organization, please visit ey.com. Transfer Pricing Group 2017 EYGM Limited. All Rights Reserved. EYG no Gbl NY ED None This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax, or other professional advice. Please refer to your advisors for specific advice. ey.com