Global Tax Alert (News from Transfer Pricing) | 6 November 2017
Indian Tax Administration releases final rules on Country-by-Country reporting and Master File implementation
The Indian Government through Finance Act, 2016 amended the Indian income tax law (ITL) to introduce provisions for additional transfer pricing (TP) documentation and Country-by-Country (CbC) reporting to implement the recommendations contained in the Organisation for Economic Co-operation and Development’s (OECD’s) Base Erosion and Profit Shifting (BEPS) report on 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 the master file for public comments.1 Following the submission of public comments from various industry stakeholders, on 31 October 2017, the Indian Tax Administration issued the final rules for CbC reporting and the furnishing of the master file (Final Rules). The Final Rules contain a few administrative changes and clarifications. Key highlights of the Final 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 report (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
- The due date for the first year, i.e., financial year (FY) 2016-17 master file compliance, as well as for CbC reporting has been extended to 31 March 2018. For subsequent FYs, the master file and CbC report need to be filed on or before the due date for filing the income tax return
- A notification regarding the details of the parent entity or the alternate reporting entity (which files CbC report) needs to be filed for every constituent entity resident in India (if its parent entity is not resident in India) at least two months prior to the due date for filing an income tax return. For FY 2016-17, such due date would be on or before 31 January 2018
This Alert provides an overview of the Final Rules including a summary of the ITL provisions with respect to the master file and CbC reporting.
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 multinational enterprises (MNEs) and Tax Administrations. The 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 TP 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 were to be sent by 16 October 2017. After having considered the public comments, on 31 October 2017, the Indian Tax Administration released the Final Rules on CbC reporting and furnishing of the master file. The Rules are applicable for the FYs effective from 1 April 2016.
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 Final 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:
- 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,2 exceeds INR5 billion (approx. US$76.9 million). Further, the Final Rules clarify that for the purpose of computation of the INR value of the consolidated group revenue (if it is reported in a foreign currency), telegraphic transfer buying rate of such foreign currency (as quoted by State Bank of India) on the last day of the accounting year would be adopted.
- Either of the below transactional thresholds is achieved for the accounting year:3
- 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)
Under the ITL, the accounting year where the ultimate parent entity/alternate reporting entity resident in India would be the FY starting from 1 April and ending on 31 March of the following year. In all other cases, the reporting accounting year would be an annual accounting period, with respect to which the parent entity of the international group prepares its financial statements under any law for the time being in force or the applicable accounting standards of the country or territory of which such entity is resident.
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.
The Indian Tax Administration has considered that the above guidance and the Final Rules are largely in line with the contents as prescribed under the Action 13 report. The Final Rules, however, require the following key additional information:
- Maintenance of a list of all the entities4 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 or assets or profits of the group.5 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 prescription of group financing activities, including financing arrangements with unrelated lenders.
- In a number of instances, the Final 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 Final Rules prescribe a separate statutory form i.e., Form 3CEAA6 wherein each constituent entity should furnish the prescribed information and documents. Form 3CEAA 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, accounting year for which the report is being submitted, 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 the Action 13 report and a few additional information as mentioned above.
The Final Rules provide that Form 3CEAA should be verified and signed by the person who is competent to verify the income tax return of the constituent entity under the ITL.
Filing procedures and filing due dates
As per the Final Rules, every constituent entity resident in India, shall furnish the information as contained under Part A of Form 3CEAA 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 3CEAA 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 2016-17, the Final Rules provide that the due date for furnishing the master file in Form 3CEAA is 31 March 2018.
Further, in cases where there are more than one constituent entity resident in India of an international group,7 the Final Rules allow for a single filing of both Part A8 and B of Form 3CEAA by a designated constituent entity. Notification of the same needs to be filed in Form 3CEAB 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 3CEAA.
Filing of the master file in Form 3CEAA as well as the notification by a designated constituent entity of an international group in Form 3CEAB 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 3CEAA 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).
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 Final 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). Similar to the Final Rules on master file maintenance, the Final Rules on CbC reporting provide that for the purpose of computation of the INR value of the consolidated group revenue (if it is reported in a foreign currency), telegraphic transfer buying rate of such foreign currency (as quoted by State Bank of India) on the last day of the accounting year would be adopted. 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 Final Rules are largely in line with the above guidance and prescribe filing of the economic information of the international group as per above. The Final Rules also incorporate “administrative, management or support services” as one of the Main Business Activities in Table II, which was omitted in the Draft Rules. The definitions given under Final Rules are in line with the 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:
- If 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) is resident in India
- If there is a constituent entity in India belonging to an international group and the parent entity of the group is resident in a country which is either:
- A country with which India does not have an arrangement9 for exchange of the CbC reporting
- A country that is not exchanging information with India even though there is an agreement and this fact has been communicated 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 required to furnish a CbC report if the same can be obtained under the agreement of exchange of CbC reports by the Indian Tax Administration.
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:
- The constituent entity in India is the alternate reporting entity of the international group
- Provide the details of the parent entity or the alternate reporting entity, which will be the reporting entity of the international group and the country or territory of which the said entities are residents
Such notification needs to be done in Form 3CEAC to the Director General of Income Tax (Risk Assessment) at least two months10 prior to the due date for filing the income tax return.
In light of the fact that FY 2016-17 will be the first reporting year for the furnishing of CbC reports in India and as framing final rules on CbC reporting took some time, the Indian Tax Administration, through a circular dated 25 October 2017, extended the due date for filing the CbC report to 31 March 2018 for the FY 2016-17. Accordingly, the notification due date for FY 2016-17 would be on or before 31 January 2018.
Filing of notification in Form 3CEAC would be done electronically and the designated authorities shall specify the procedure for such online notification. This Form should be verified and signed by the person who is competent to verify the income tax return of the constituent entity under the ITL.
CbC report filing requirements and filing due dates
According to the Final 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 3CEAD by the due date for filing the income tax return. It may be noted that for the FY 2016-17, the due date would be 31 March 2018 pursuant to a circular issued by the Indian Tax Administration on 25 October 2017.
In the case where there are more than one constituent entities of an international group resident in India, then Form 3CEAD 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 3CEAE.
Filing of the CbC report in Form 3CEAD and notification in Form 3CEAE would be done electronically and the designated authorities shall specify the procedure for such online filing and notification. These Forms should be verified and signed by the person who is competent to verify the income tax return of the constituent entity under the ITL.
Monetary penalty for non-compliance
Under the ITL, monetary penalties are applicable if the reporting entity fails to furnish or furnishes an inaccurate CbC report within the due date unless the taxpayer is able demonstrate “reasonable cause” for such non-compliance. The prescribed sum of penalties are as follows:
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
Data security of the information filed in the master file and CbC report
The Final 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.
The Indian master file and CbC reporting Final Rules released by the Indian Tax Administration are broadly in line with OECD guidance in Action 13. While the Final Rules require the Indian constituent entities to furnish a few additional details in the master file which deviates from the BEPS Action 13 recommendation, it appears that the Indian Tax Administration has considered such requirement to be relevant for risk assessment purposes from an India standpoint. The Final Rules however still do not provide clarity on transitional issues which may arise where jurisdictions where the parent entity is located have a delayed implementation of CbC reporting or are not able to sign a competent authority agreement for exchange of the CbC report before the due date for Indian tax filing.
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.
1. See EY Global Tax Alert, Indian Tax Administration releases draft rules on Country-by-Country reporting and Master File implementation for public comment, dated 10 October 2017.
2. The Draft Rules provided for the accounting year preceding such previous year for determining the monetary threshold.
3. Reporting year replaced with accounting year.
4. The Draft Rules required maintenance of a list of all “operating” entities.
5. The Draft Rules seemed to suggest that threshold was cumulative i.e. 10% of the revenues, assets and profits of the group.
6. As per Draft Rules, it was Form 3CEBA and accordingly, the other Form numbers (as notified in the Draft Rules) have been changed in the Final Rules.
7. As per the Draft Rules, only foreign headquartered international group could have designated a constituent entity for single filing master file information.
8. The Draft Rules did not provide for filing of Part A intimation by a single designated constituent entity.
9. Competent authority agreement for exchange of CbC reports based on existing international agreements such as the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, bilateral tax treaties and Tax Information Exchange Agreements.
10. As per the Draft Rules, the time limit was 60 days prior to the due date for furnishing CbC report.
For additional information with respect to this Alert, please contact the following:
Ernst & Young LLP (India), National International Tax Services Leader, Hyderabad
- Jayesh Sanghvi
Ernst & Young LLP (India), National Transfer Pricing Leader, New Delhi
- Vijay Iyer
EYG no. 06261-171Gbl