CBDT releases draft rules on CbCR and Master File requirements for public comments

from India Tax & Regulatory Services CBDT releases draft rules on CbCR and Master File requirements for public comments October 7, 2017 In brief The prolonged wait is finally over! Reiterating India s commitment to implement OECD s BEPS Action Plan 13, the Indian Central Board of Direct Taxes (CBDT) has prescribed the draft rules for maintaining and furnishing of transfer pricing (TP) documentation in the Master File (MF) and Country-by-Country report (CbCR). Following an inclusive approach when introducing a new and important regulation, the CBDT has, in line with global best practices, sought public comments on the draft rules. The new rules proposed to be inserted are Rules 10DA and Rule 10DB of the Income-tax Rules, 1962 (the Rules), and the new Forms prescribed are Form Nos. 3CEBA to 3CEBE. In detail Master File (governed by Rule 10DA of the Rules, and Form Nos. 3CEBA and 3CEBE): i Applicability made subject to threshold: MF shall be applicable to every constituent entity (CE) of an international group (whether inbound 1 or outbound 2 ), subject to the following twin conditions (hereinafter referred to as Applicable CE ): Consolidated revenue of such international group as reflected in its consolidated financial statements (CFS) for the previous accounting year should exceed INR 5billion; and The aggregate value of international transactions of the CE: - during the reporting accounting year (as per books of accounts) exceeds INR 500 million, or - aggregate value of international transactions of the CE in respect of purchase, sale, transfer, lease or use of intangible property during the reporting accounting year (as per books of accounts) exceeds INR 100 million. Observation: Several representations have been made by various stakeholders to the CBDT for linking the applicability of MF filing with a certain threshold. Quite evidently, the CBDT has heard this. However, the consolidated group revenue threshold of INR 5 billion seems quite low for inbound groups and could result in situations requiring the inbound group to prepare a MF only for India, whereas may not even have access to information to prepare a MF. As a matter of fact, countries such as Japan, Russia and Australia have a higher consolidated group revenue threshold with respect to MF. Similarly, for outbound groups, the threshold of INR 500million and INR 100 million seems to be on the lower side. Therefore, a review of the thresholds may be required. 1 Having parent entity resident in a jurisdiction other than India. 2 Having parent entity resident in India. www.pwc.in

On a micro level, it may be noted that the language used in this rule with respect to the INR 5 billion threshold is with respect to accounting year preceding such previous year the reference to previous year seems to imply that the accounting year being referred to herein is the financial year (FY) in the Indian context. Although this will apply to an Indian outbound group, but may not for an inbound CE resident in India, whose parent entity follows an accounting year different from the Indian FY. Accordingly, a modification to the language of this rule may be warranted. ii Information and documents to be kept and maintained: The documentation prescribed in respect of the MF is largely in line with OECD s final BEPS Action Plan 13 report, but for the following key deviations: The Indian MF requires a description of the functions performed, assets employed and risks assumed by CEs of the international group that contribute to at least 10 percent of revenues, assets and profits of the group. Whereas, OECD requires a description of principal contributions to value creation by individual entities of the group. Observation: At the outset, it is not clear whether the 10 per cent is with reference to a singular base or a cumulative base of revenues, assets and profits. Further, although the financial metric of 10 percent is more definitive, yet it is likely to create a greater compliance burden. The Indian MF has introduced a new requirement of providing a list of all the entities of the international group engaged in development and management of intangibles along with their addresses. Observation: With this new requirement, the focus seems to not only be on legal ownership of intangibles, but also on their economic ownership. The Indian MF has, in several instances, warranted the need for detailed information as against general description required by the OECD. Observation: The focus of the CBDT is clearly towards getting in-depth information rather than anything generic. On an overall basis, it may be worth considering that more the Indian Rules prescribe MF requirements over and above the OECD template, higher will be the compliance burden in India, because globally prepared MFs will need to be customised for India. iii Due date and prescribed authority: The MF is to be furnished in Form No. 3CEBA and it shall be furnished to the DGIT (Risk Assessment) by the due date of filing of return of income (ROI), with the exception of FY 2016-17, in which case the MF (i.e., Form No. 3CEBA) may be furnished by 31 March 2018. Observation: The MF filing due date has been aligned to the due date for filing the ROI, and it also seems that the MF filing has been contemplated for a reporting accounting year which is the same as the Indian FY (i.e., April to March). While this may work well for an Indian outbound group, however, it may not for an inbound CE resident in India. This is because there is a high likelihood of the parent entity of an inbound CE resident in India, following a different reporting accounting year and having a filing deadline which does not coincide with the Indian ROI filing deadline. Accordingly, at least for the first year of implementation, the filing timeline for a MF for an inbound CE resident in India could have been made concurrent with filing timelines in the jurisdiction of the parent entity. Also, practically speaking, will not have access to the MF unless it has been filed/ made available by the parent entity in the first place. Thus, the above mentioned alignment of filing timelines would go a long way in ensuring ease of compliance by. iv Filing specifications: Part A of Form 3CEBA to be filed by every CE (regardless of any threshold). Observation: The provisions relating to MF in the Incometax Act, 1961 (the Act) require MF maintenance and filing by every CE who has entered into an international transaction. On the contrary, it seems that Part A of the Form 3CEBA is required to be filed by every CE even if it has not entered into an international transaction. Accordingly, this rule may require some modification so as to align with the provisions of the Act. Part B of Form 3CEBA to be filed only by the Applicable CE. The MF is to be filed electronically, and the procedures to do so will be specified. The MF shall be kept and maintained for a period of eight years from the end of the relevant assessment year. PwC Page 2

Where there are more than one CEs resident in India, then the MF is to be furnished by that CE which has been designated by the international group to do so, and the same has been notified to the DGIT (Risk Assessment) by the international group or the designated CE. Such notification is to be filed in Form 3CEBE, and must be done at least 30 days before the due date of filing the MF. Observation: This rule will mostly benefit Indian outbound groups and inbound groups which have many entities operating in India, as it will provide administrative relief with respect to filing of MF. Further, another administrative point worth noting is that although the MF has to be filed electronically, it seems that the rules have inadvertently missed out on specifying the requirement of electronic filing of Form 3CEBE. v Security of information filed in the MF: Specified income-tax authorities shall be responsible for evolving and implementing appropriate security, archival and retrieval policies in relation to the information furnished in the MF. Observation: Various stakeholders have had concerns about the confidentiality and security of information filed as part of the MF. The fact that the draft rules have specifically spelt out that the responsibility for holding secure of such information vests with the Indian income-tax authorities is a significant positive. CbCR (governed by Rule 10DB of the Rules, and Form Nos. 3CEBB to 3CEBD): i Threshold for CbCR: The total consolidated group revenue of the international group shall be INR 55 billion or more in the CFS of the preceding accounting year for applicability of CbCR provisions. Observation: The threshold for applicability of CbCR is prescribed in Indian Rupees. This will work well for an Indian outbound group. However, it may not for an inbound CE resident in India particularly 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, but on conversion to INR exceeds the threshold of INR 55 billion. This may lead to situations where the CbCR is required to be prepared only for India, and such situations as far as possible should be avoided. In such cases, an exemption from CbCR applicability may be prescribed for the inbound CE resident in India. ii Filing specifications and due dates: An inbound CE resident in India shall notify to the authorities in Form 3CEBB, the following: - whether it is the alternate reporting entity (ARE) of the international group; or - the details of the parent entity or the ARE, as the case may be, of the international group and their country of residence. This notification shall be made at least 60 days before the due date of filing the ROI. Observation: It seems uncanny to link the notification filing deadline for an inbound CE resident in India to a date which is relevant for CbCR filing by an Indian outbound group (i.e., due date of filing ROI). If at all the notification filing deadline is made subject to the due date of filing the ROI, then, for FY 2016-17 this date may clearly require an extension. For every Indian outbound parent entity or an ARE resident in India (which is required to file a CbCR) the CbCR shall be furnished to the DGIT (Risk Assessment) in Form 3CEBC. Observation: Similar to MF filing, the due date for CbCR filing for FY 2016-17, i.e., 30 November 2017 may need to be extended. For every inbound CE resident in India [which is required to file a CbCR, i.e., if the provisions of section 286(4) of the Act are applicable to it] the CbCR shall be furnished within the specified time. Observation: The due date of filing the CbCR by an inbound CE resident in India has not been explicitly clarified. The due date may not be linked to the due date of filing the ROI as the CbCR filing requirement for inbound groups is contingent to the provisions of section 286(4) of the Act. In this case, at least in the first year of implementation, the due date may be linked to the due date of filing of CbCR by the parent entity in its jurisdiction. If for an international group, there are more than one (required to file a CbCR), then Form 3CEBD is to be furnished by that CE which has been designated by the international group to do so, PwC Page 3

and the same has been notified to the DGIT (Risk Assessment). Observation: It may be noted that the due date for filing of such notification has not been specified. The CbCR and related Forms are to be filed electronically, for which procedures to do so will be specified. iii Information requested: The prescribed details in respect of CbCR (Form No. 3CEBC) is largely in line with OECD s final BEPS Action Plan 13 report. iv Security of information filed in the CbCR: The specified income-tax authorities shall be responsible for evolving and implementing appropriate security, archival and retrieval policies in relation to the information furnished in the CbCR. The takeaways While the release of the draft rules for public comments has been welcomed by various stakeholders, however, there are certain aspects which require some ironing out to ensure smooth implementation of the Rules. In particular, the Indian Rules seem to require more data as compared to the OECD requirements. Here, there is perhaps a need to strike a balance between the need for additional data on the one hand (leading to higher compliance burden), versus data that may be deemed sufficient for a risk assessment. Clearly, with the new Rules, both inbound and outbound entities operating in India will have a fair bit of information to maintain and disclose. This will require entities to gear up their execution capabilities especially from the perspective of human resources and technology. In the past there has been an overarching concern as to how information disclosed in the MF and CbCR will be used. In this regard, in various forums, representatives of the Government of India (GoI) have stated that CbCR data shall be used for TP risk assessment and assessment of other BEPS related risks, and not for making TP adjustments. However, since the information flow will soon start, it would be important for the GoI to ensure that appropriate policies and timely safeguards are in place. Further, post finalisation of these Rules, we also hope that, like in the past, the GoI may release FAQs to provide additional guidance on implementation of these Rules. In specific, guidance on whether or not an inbound CE resident in India is required to file a CbCR in the absence of a CbCR being prepared/ required globally, will provide the much needed clarity around CbCR filing requirements for such groups. This would go a long way in ensuring ease of compliance. Let s talk For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor PwC Page 4

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