Indian MNCs back to the drawing board

A look at the impact of country-by-country reporting and Master File rules



No sooner did India Inc heave a sigh of relief on completing the implementation and first compliance cycle for Goods and Services Tax (GST) than it is greeted by new compliances.

As the government keeps taking steps to digitise the economy and increase transparency, the Central Board of Direct Taxes (CBDT), issued draft rules on October 6, 2017, on country-by-country reporting (CbCR) and Master File (MF).

The eagerly awaited rules for Indian taxpayers pertaining to CbCR and MF have been proposed by the government, reiterating its commitment to implement the “minimum standards” agreed under Action Plan 13 of OECD’s Base Erosion and Profit Shifting (BEPS) project, titled “ Transfer Pricing Documentation and Country-by-Country Reporting”.

The draft rules were released by the CBDT to invite public comments and suggestions, to be provided by October 16, 2017, by the various stakeholders. Specially for the India headquartered multinational groups (Indian MNCs), it’s back to the drawing board and transfer pricing once again takes centrestage in board discussions. Let us analyse some key highlights of the draft rules and their impact on Indian MNCs.

What does the rule book say?

The threshold for the applicability of CbCR of ₹5,500 crore is in line with the threshold of ₹5,395 crore as per Finance Act, 2016 and €750 million suggested under BEPS Action Plan 13.

The draft rules for prescribed details in respect of CbCR are also in line with OECD’s final BEPS Action Plan 13 report. Further, the definition under draft rules is also in sync with the said BEPS report. Thus, the CbCR requirements have not caused much of a surprise and seem to be on the global pattern.

However, the deadline for CbCR is a challenge since November 30, 2017, (for FY16-17) would be a daunting task. An extension till, say, March 31, 2018, would provide Indian MNCs the time necessitated to collate the extensive information required.

The MF requirements, on the other hand, have been introduced with much lower applicability thresholds and also have an extended submission deadline of March 31, 2018, for FY16-17. The idea here could be on the lines of Domestic Transfer Pricing to keep a lower threshold initially and assess the tax risk and later on increase the threshold to sieve out the simpler entities.

The draft rules prescribe documentation in respect of the MF largely in line with OECD’s final BEPS Action Plan 13 report.

However, this requires some additional information as well. With the new requirements, the focus seems to be not only on the legal ownership of entities and intangibles but also on the economic activities undertaken by each entity of the group, along with the economic ownership of intangibles.

Impact on Indian MNCs

The draft rules for MF and CbCR are a mixed bag for Indian MNCs. In the prescribed threshold limits for applicability, Indian tax authorities have tried to strike a balance between ease of doing business and the data required for tax risk evaluation. However, the relatively lower thresholds, particularly for MF, will bring a lot of relatively small and mid-sized Indian MNCs within the ambit of the MF requirements.

As the Indian MNCs gear up for the annual ritual of tax compliances, complying with a totally new requirement could be too much to handle. Also, considering the extensive nature of information to be provided in both CbCR and MF, timelines for CbCR filings can be made in sync with MF timelines of March 31, 2018 for FY16-17.

The specified Income Tax Authorities are responsible for evolving and implementing appropriate security, archival and retrieval policies in relation to the information furnished in the MF and CbCR. This will certainly assist in data confidentiality and security, an area where many Indian MNCs have expressed their concerns.

Like any new rules and compliances making their way into a system, the MF and CbCR rules will also have their share of teething issues. The CBDT, on its part, must issue timely FAQs on various issues in MF and CbCR filings to avoid confusion and ensure smooth implementation of the rules.

For the Indian MNCs, it’s time to head back to the drawing board and plan for the new challenges. In hindsight, these rules may just help Indian MNCs explain their complex structures and value chain analysis in a better manner at the time of audit. Hence, a better planned and detailed documentation is the need of the hour, which would require sufficient time and resources from the management. A stitch in time saves nine!

Rakesh Nangia is Managing Partner, and Nitin Narang, Executive Director- Transfer Pricing, Nangia & Co LLP

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