On 31 March, constituent entities (CEs) belonging to any multinational enterprise (MNE) group crossed the first lap of filing country-by-country (CbC) reports to the Indian tax authorities, disclosing information on revenues, profits and taxes. India is among the 60-odd countries that have implemented or taken steps to implement CbC reporting (CbCR) as part of committing themselves to the three-tiered documentation approach to transfer pricing advocated by the OECD in
action 13 of its Base Erosion and Profit Shifting (BEPS) Action Plan.
India is also one of the 68 countries that have signed the Multilateral Competent Authority Agreement on the Exchange of Country-by-Country Reports, which entered into force on 12 May 2016. In addition, tax information exchange agreements and double taxation avoidance agreements that India has entered into with various countries provide for exchange of information.
The introduction of CbCR will increase costs of compliance and administration for MNE groups, while tax authorities will need to dedicate resources to comprehend and mine the CbCR data. A primary concern in CbCR is the extent to which such reporting could be used by the tax authorities in making transfer pricing assessments.
The Action Plan identifies the objective of transfer pricing documentation as aiding authorities in making transfer pricing risk assessments and audits. As per the Model Multilateral Agreement, a CbC report will be used “for assessing high-level transfer pricing, BEPS related risks” and “will not be used as a substitute for a detailed transfer pricing analysis”. Information in a report “on its own does not constitute conclusive evidence that transfer prices are or are not appropriate” and transfer pricing adjustments will not be based on a CbC report.
The OECD’s guidance on appropriate use of information contained in CbC reports recommends that each jurisdiction’s tax authority have a written policy in place setting out clearly that the information must be used for appropriate purposes, including a description of what is meant by appropriate use, and also monitor and control use of the reports. India has yet to make provisions in domestic law that are needed to bring clarity to all stakeholders.
Some practical challenges arise where the text of the domestic law results in ambiguities. For example, in India, the threshold of consolidated group revenue that triggers CbC reporting is ₹55 billion (US$823 million) but the term consolidated group revenue is not defined.
The prescribed form for CbC reports in India requires revenues to be disclosed by tax jurisdiction. The definition of revenues provided in the form includes revenues from sale of inventories and “properties”. While this definition has been adopted from the model law provided in the Action Plan, prima facie, it appears that gains from sale of capital assets would be included within the ambit of revenues and thus within the ambit of consolidated group revenues. The OECD’s guidance on implementing CbCR recommends excluding comprehensive income/earnings, revaluations and unrealized gains reflected in the balance sheet, if incorporated in the domestic law, which would address this specific issue.
Clarity is also required in the manner of reporting financial data related to permanent establishments (PEs) and in reporting data related to associated enterprises. As regards PEs, it is unclear whether financial data asked for in the specified form is to be furnished for PEs also. The Action Plan clarifies that a PE should be reported by reference to the tax jurisdiction in which it is situated. With respect to associated enterprises, the OECD’s guidance provides that for the purposes of reporting revenues from related parties, the term associated enterprises should be interpreted as CEs which are named in the CbC report. The Indian legislation lacks similar clarity.
Another challenge relates to the time frame for furnishing CbC reports. If an entity which is a tax resident of India is identified for CbCR, data for CEs must also be provided with respect to the 1 April-31 March fiscal year irrespective of the global practices followed by the MNE group. This can impose an additional burden on CEs to provide data that are congruent with this fiscal year. A uniform definition of fiscal year as provided in the Action Plan may act as a solution here.
Teething issues are inevitable in the initial few years of CbCR implementation. Addressing these issues will help ensure that entities across the globe adopt acceptable transfer pricing policies and that tax jurisdictions get their rightful share of profits earned.
L Badri Narayanan is a partner and Bharathi Krishnaprasad is a senior associate at Lakshmikumaran & Sridharan.
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