Country by country (CbC) reporting reaches Indian shores By aresh arekh, artner, EY March 2, 2016
Contents CbC reporting BES Action 13 - background Budget 2016 proposals Global overview age 2
BES - What is Action 13 and why does it matter? Action 13 focuses on T documentation and includes the CbC report. Large amounts of previously possibly undisclosed data suggested to be made available to tax authorities Action 13 is designed to increase transparency by providing tax authorities with sufficient information to allow them to conduct transfer pricing risk assessments and consider whether groups have engaged in BES-type activities. It requires companies to use a consistent three-tier framework for providing information on global allocation of income, economic activity and intercompany pricing across all of a company s global operations. CbC reporting applies to multinational enterprises. Master file High-level information about the MNE s business, transfer pricing policies and agreements with tax authorities in a single document available to all tax authorities where the MNE has operations Local file Detailed information about the local business, including related-party payments and receipts for products, services, royalties, interest, etc. CbC report High-level information about the jurisdictional allocation of profits, revenues, employees and assets age 3
Budget 2016 proposals - BES Action 13 arrives on Indian shores Why: To provide tax administrations with useful information to assess transfer pricing risks. It will facilitate tax administrations to make determinations about where their resources can be most effectively deployed Next Steps: Rules for details of master file & CbC reporting to be prescribed Master File & CbC reporting When: Applicable from 1 April 2016 (i.e. FY 2016-17) CbC - Euro 750 mn [conversion rate last date of year] What s new: Section 92D(1) proviso Master file containing standardised information relevant for all multinational enterprises (MNE) group members Section 286 - CbC report containing certain information relating to the global allocation of the MNE s income and taxes paid together with certain indicators of the location of economic activity within the MNE group age 4
CbC reports filing & exchange mechanism What Who When Filing CbC report in India for every reporting accounting year [section 286(2)] Indian resident which is parent entity of group ( Indian parent ) Alternate reporting entity, which is resident in India ( Indian ARE ) Due date of filing return of income under section 139(1) [ due date ] Filing of CbC report in India in special cases by due date [section 286(4)] Constituent entity resident in India not being Indian parent or Indian ARE India does not have agreement for exchange of report [ ERA ] with country/territory of parent entity of group or Systemic failure of country or territory to automatically exchange CbC report AND, Constituent entity is notified of failure by Indian tax authorities Exchange of CbC report through ERA between arent country and India arent entity files CbC report in the country of its tax residence CbC report to be automatically exchanged through ERA entered into between India and parent entity s country Exchange of CbC report through ERA entered into between ARE country and India [section 286(5)] ARE files CbC report in the country of its tax residence Report is required to be filed in ARE country and India has ERA with ARE country No systemic failure of exchange of report Indian tax authorities are notified about ARE by Indian constituent entity age 5
CbC reporting key definitions section 286(9) Term Definition Group Group includes parent entity and all the entities in respect of which a consolidated financial reporting for financial reporting purposes is prepared or would have been prepared (if in case equity shares would have been listed on stock exchange) International group Two or more enterprises which are resident of different countries/territories or Enterprise being resident of one country/territory carrying on business through permanent establishment (E) in other countries/territories arent entity Entity of the group holding directly or indirectly an interest in one or more of the other entities of the group such that it is required or would have required(if in case equity shares would have been listed on stock exchange) to prepare consolidated financial statements as per laws in force/accounting standards of country/territory of which entity is resident Constituent entity Any entity of international group that is included in consolidated financial statement that is excluded from consolidated financial statement on the basis of size or materiality that is E of any separate business entity and such E prepares separate financial statement for financial reporting, regulatory, tax reporting or internal management control purposes ARE A constituent entity that has been designated to furnish CbC report in place of parent entity in country or territory in which such constituent entity is resident age 6
R & D Holding or managing I urchasing or procurement Mfg or production Sales, marketing or distri. Admin., Mgmt or support services rovision of services to unrelated parties Internal group finance Regulated financial services Insurance Holding shares or other equity instruments Dormant Other CbC report template Table 1: Revenues Tax jurisdiction Unrelated party Related party Total rofit (loss) before income tax Cash Tax aid (CIT and WHT) Current year tax accrual Stated capital Accumulated earnings Tangible assets other than cash and cash equivalents Number of employees 1. 2. 3. 4. 5. Table 2: Tax jurisdiction 1. Constituent entities resident in the tax jurisdiction Tax jurisdiction of organization or incorporation if different from tax jurisdiction of residence Main business activity(ies) 2. 3. 1. 2. age 7
BES - Master File information required Organization structure Business description Intangibles Intercompany financial activities Financial and tax positions Structure chart: Important drivers of business profit Overall strategy description Financing arrangements for the group Annual consolidated financial statements Legal ownership Geographic location Supply chain of: 5 largest products/services by turnover roducts/services generating more than 5% of turnover List of important intangibles and legal owners Identification of financing entities List and description of existing unilateral Advance ricing Agreements (AAs) and other tax rulings Main geographic markets of above products List of important intangible agreements Details of financial transfer pricing policies List and brief description of important service arrangements R&D and intangible transfer pricing policies Functional analysis of principal contributions to value creation by individual entities Details of important transfers Business restructuring/ acquisitions/ divestitures during fiscal year age 8
Foreign HQ MNCs and Indian HQ MNCs requirements summary MNCs Upfront notification Annual filing Inbound MNCs Whether it is ARE of the international group; or Details of the parent entity or the ARE of the international group and the country and territory of which the said entities are resident Master file Local file CbC report only if ARE or in cases of failure of exchange mechanism Outbound MNCs - CbC report Master file Local file age 9
Indian HQ MNCs possible issues Data collection in respect of each country in which Indian MNE group has operations Availability of software/er database packages? Mapping data in respect of Es separately Identification of outliers in advance and entity structure rationalization, if required Consistency Sustainability Higher degree of scrutiny by transfer pricing authorities to check consistency in transfer pricing policy of MNE group across countries Accounting seconded employees and contract workers? Accounting of joint ventures and special events like assets or entity disposals? Regular check on Action 13 implementation by different countries to avoid mismatch/non-compliance age 10
Foreign HQ MNCs possible issues Higher degree of scrutiny by transfer pricing authorities on account of end to end transparency in respect of revenue and profit allocation Enhanced risk of attempt by transfer pricing authorities applying profit split method to allocate higher amount of profits to India Increase in compliance burden for MNEs investing in India otential value chain transparency and business strategy disclosure on account of master file reporting lace and contribution of Indian entity in entire value chain? otential disclosure of unilateral Advance ricing Agreements (AAs) signed by taxpayer in different countries (as per master file requirements given by OECD) Indian tax authorities may demand consistency in pricing across the group May influence the AA negotiation process in India age 11
ossible Risk exposures arising from wider value chain transparency I Finished goods Global I owner Royalties Regional principal ayment Local distributors Local distributors Local distributors 40% of system profits 50% of system profits 10% of system profits Today- local jurisdictions only see local transactions e.g. is distributor appropriately remunerated? age 12
enalty provisions [section 271AA/271GB] Nature of penalty enalty Failure to furnish the master file by prescribed date Rs 500,000 Furnishing inaccurate particulars in the CbCR (subject to certain conditions) Rs 500,000 Failure to submit CbCR by the reporting entity a) Where period of failure 1 month b) Where the period of failure > 1 month c) Continuing default after service of penalty order Rs 5,000 per day Rs 15,000 per day Rs. 50,000 per day Failure to respond within 30 days to CbCR related queries [extendable by max 30 days] Rs 5,000 per day upto service of penalty order Rs. 50,000 per day for default beyond date of service of penalty order age 13
Global overview - Master/ Local File Implementation oland: master file mandatory for entities larger than 20 million, local file more than 10 million Status Already implemented Implementation in progress Spain: mandatory for groups larger than 45 million Singapore and Greece have already implemented documentation requirements similar to Action 13 master file and local file. age 14
Global overview - CbC report Around 16 Countries have introduced proposals/laws in their local regulations to implement CbC reporting European Union (EU) has introduced draft anti-bes directive and anti-avoidance package which contains CbC reporting EU countries will need to give effect to the directive by introducing CbC reporting in their local tax legislations On 27 January 2016, 31 countries signed the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports (MCAA CbC) US has proposed CbC regulations but has not signed MCAA CbC On signing MCAA-CbC may act as ERA for Indian tax purposes age 15
CbC reporting Global overview OECD Australia China Denmark Finland France European Union Status Who When Ultimate arents of group with revenue of EUR 750 million or greater For fiscal years starting in 2016, with filing within 12 months from fiscal year end Adopted legislation on 3 December 2015, to take effect as of 1 January 2016. Threshold of AUD 1 billion (approximately EUR 670 million) Draft legislation published Threshold of RMB 5 billion (approximately EUR 705 million) To be filed together with the annual tax return (due 31 May). ossible to apply for an extension. Bill approved by parliament on 18 December 2015, to take effect as of 1 January 2016. Draft bill published on 21 December 2015. Bill approved by parliament on 18 December 2015, to take effect as of 1 January 2016. roposal for changes to the Directive on Administrative Cooperation published on 28 January 2016. Threshold of DKK 5.6 billion (approximately EUR 750 million) The government intends for the provisions to be enacted and effective beginning of 2017. Secondary filing rule 1.Local filing or 2.Filing by named Surrogate arent entity enalties Left to countries General penalty for non compliance Consistent with OECD recommendations Local filing General penalty regime. * General penalty regime. Local filing enalties in the Specific penalty maximum amount regime. Should of EUR 25,000. not exceed EUR 100,000 * Local filing may be only for the local entities and its subsidiaries At the discretion of Member States, must be effective, proportionate and dissuasive. age 16
CbC reporting Global overview OECD Ireland Italy Japan Mexico Netherlands Status Adopted legislation applicable as of 1 January 2016 ublished legislation in the Official Gazette on 30 December 2015, to apply as of 1 January 2016. Draft legislation published on 16 December 2015. ublished legislation on 18 November 2015, to apply as of 1 January 2016. ublished legislation in the Official Gazette on 30 December 2015, to apply as of 1 January 2016. Who When Secondary filing rule age 17 Ultimate arents of group with revenue of EUR 750 million or greater For fiscal years starting in 2016, with filing within 12 months from fiscal year end 1.Local filing or 2.Filing by named Surrogate arent entity * enalties Left to countries enalty applicable for not complying with tax return obligation. Consistent with OECD recommendations Local filing Specific penalty between 10,000 and 50,000 may apply. * Revenues in excess of JY100 billion (approximately US$820 million) Revenues in excess of 12 billion pesos (approximately EUR 650 million) roposed to apply to taxable years beginning on or after 1 April 2016 General penalties and presumptive taxation may apply in case of noncompliance. In addition to penalties, non compliant taxpayers may be disqualified from entering into contracts with the Mexican public sector. Criminal penalty for non compliance possible. Local filing may be only for the local entities and its subsidiaries
CbC reporting Global overview OECD Norway oland ortugal Spain United Kingdom United States Status Who When Secondary filing rule Ultimate arents of group with revenue of EUR 750 million or greater For fiscal years starting in 2016, with filing within 12 months from fiscal year end 1.Local filing or 2.Filing by named Surrogate arent entity ublished draft legislation for consultation on 2 December 2015. Revenues in excess of NOK 6.5 billion (approximately USD 730 million) Adopted regulations applicable as of 1 January 2016. Draft law published on 5 February 2016. Adopted implementing regulations applicable as of 1 January 2016. Implementing regulations published 26 February 2016, to enter in force on 18 March 2016. First reporting should be done in 2018 based on figures from 2016. None Local filing * roposed regulations published on 21 December 2015. Revenue of $850 million or greater For taxable years beginning on or after the date final regulations are published None enalties Left to countries General penalty for non compliance. General penalty for non compliance with reporting obligations Specific penalty for not filing the report, as well as other general penalties may apply. General penalty for non compliance with reporting obligations Specific penalty for non compliance General reporting-related penalties may apply Consistent with OECD recommendations age 18 * Local filing may be only for the local entities and its subsidiaries
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