India has been one of the pioneers and major contributors to the OECD BEPS initiative. India has been actively pursuing the BEPS agenda and introduced some proposals to adopt the OECD’s recommendations. One significant change is the incorporation of master file and CbyC reporting in the Indian transfer pricing regulations.
One of the major recommendations adopted by India under the BEPS Action Plan is the introduction of master file and CbyC reporting in the Indian transfer pricing regulations, with effect from the fiscal year beginning 1 April 2016, in line with BEPS Action 13.
The master file and CbyC reporting requirements predominantly enforce the principles of BEPS Actions 8 to 10 and Action 13 on transfer pricing. The risks in, and value drivers of, business operations and their related rewards are closely associated with strategic functions or ‘substance’. Thus, they cannot be disassociated from each other merely through formal intercompany agreements between associated enterprises.
To ensure these principles are followed, Chapter V of the OECD transfer pricing guidelines was rewritten under the BEPS project to provide for more robust documentation and disclosure mechanisms. The goal is to provide tax administrators worldwide with the data they need to monitor whether risks, rewards and value align with substance and selectively identify cases for transfer pricing audits based on risk assessment.
Action 13 provided for three tiers of transfer pricing documentation, namely, master file, local file and CbyC reports. Most countries with transfer pricing regulations, including India, already require ‘local file’-type documentation from local entities on their transactions with foreign related parties. The master file and CbyC reporting requirements are new.
The master file is expected to provide an overview of a multinational group’s global business model, specifically covering:
The guidelines ask taxpayers to use prudent judgment in determining the level of detail for master file information, keeping in mind the objective of providing tax administrators with a high-level overview of the multinational company group’s global operations and policies.
CbyC reporting requires data about the functions performed, assets owned, personnel employed, revenue generated, profits earned, taxes paid, capital structure, retained earnings and other information about each entity of the multinational group located in different countries. Thus, CbyC reporting is the platform for verifying the blueprint provided in the master file. For tax administrators, CbyC reports would highlight any possible mismatch between the level of profits or revenues residing in, or intangibles owned by, a group entity, along with the functions carried out by, or capital contributed to, that entity.
The revised OECD transfer pricing guidelines recommend submission of the master file by each entity of the multinational company group to the tax administrator of the respective country, at the time of audit, in addition to the local transfer pricing documentation. The CbyC report would be prepared by the group’s ultimate parent company and filed with the tax administrator of its country, who would in turn share the report with the tax administrators of other countries in which the group has subsidiaries or permanent establishments.
The OECD transfer pricing guidelines do not mandate which entity of the multinational company group should prepare the master file. However, since CbyC reporting is the obligation of the ultimate parent of the multinational group, the parent should also prepare the master file. For efficiency, the same entity is best suited to prepare the two complementary documents. Further, only the ultimate parent would have a comprehensive view of all various business lines within the group.BEPS Action13 requires CbyC reports from multinational groups with consolidated annual turnover of EUR750 million or more, which the Indian government intends to follow.
BEPS Action 13 does not set a threshold for master file reporting, and the Indian Revenue Board has yet not prescribed one. If no threshold is prescribed, small taxpayers may be saddled with an unneeded compliance burden.
In line with BEPS Action 13, Finance Act 2016 has incorporated provisions in the Indian tax regulations that require every Indian entity that is a subsidiary or permanent establishment of a foreign parented or headquartered multinational company group to disclose the name and country of residence of its ultimate parent entity to the Indian tax authorities. The Indian authorities would then obtain the group’s CbyC report from the tax authorities of the parent’s country of residence under a mutual exchange of information arrangement.
Under the Indian regulations, the CbyC report must be filed within 8 months following the last day of the relevant fiscal year. The first fiscal year covered is from 1 April 2016 to 31 March 2017, so the first CbyC reports are due on 30 November 2017.
As these requirements took effect as of 1 April 2016, Indian parents of multinational groups should carry out clinical analyses of their businesses at the earliest opportunity. These reviews should aim to identify any exposures due to mismatches between risks, rewards and functions, and any needed corrective measures across their supply chains.
Beyond the compliance challenges, Indian multinational companies should view the new disclosure requirements as a chance to revisit their supply chain models and identify opportunities to create value through efficiencies and synergies. Further, the in-depth analyses of the organizational and operational structures required by master file and CbyC reporting could also help Indian multinational companies to identify and mitigate any possible exposures for their foreign subsidiary companies under the new regulations on the place of effective management.
India signed the Multilateral Instrument on 7 June 2017 and submitted its provisional list of countries with which it has entered tax treaties.
Among the key provisions, India, along with all the other countries, chose to adopt the principal purpose test. India also adopted the simplified limitation on benefits test under Action 6. India opted out of mandatory binding arbitration, which is one of the minimum standards. India adopted few of the other recommendations and made certain reservations from the instrument’s provisions regarding, among others, capital gains from alienation of shares or interests of entities deriving their value principally from immovable property, dividend transfer transactions, artificial avoidance of permanent establishment status through commissionaire arrangements and similar strategies, and MAPs.