The BEPS recommendations on three tier TP documentation should be introduced with utmost care taking into account the additional burden that would be placed upon the taxpayers
The run-up to the Union Budget 2016 has started and the industry is waiting eagerly for the Honorable Finance Minister, Arun Jaitley to table it in Parliament. The industry has a lot of expectations from the government given that reforms and industrial growth are the key points on their agenda. Having said that, it may not be a surprise if the government introduces measures to curb Base Erosion and Profit Shifting (BEPS) from India on which the Organization of Economic and Commercial Development (OECD) has issued extensive recommendations.
The BEPS project was launched by OECD at the request of the G20 nations. The developing countries were of the view that due to the increase in online and digital business throughout the world, there were multinational companies (MNCs), which were planning their tax affairs in a manner that led to low or no taxation of their transactions. Sophisticated tax planning measures adopted by these MNCs led to erosion of tax base in these developing nations and that was hampering their economic growth. The OECD had launched a 15 point action plan in July 2013 on various issues to avoid BEPS. Over a period of last two years OECD has issued various reports and recommendations after lot of deliberations and alterations with their own member countries, which mainly consist of all European nations, and the G20 countries (which includes India).
India has actively participated in the BEPS project over the past two years and endorses the BEPS recommendations. It has decided to make the required administrative and legislative changes on the basis of BEPS final reports issued by OECD in October 2015. While the developing countries were endorsing BEPS, developed economies like the U.S. were showing some resistance to implement the BEPS project as they believed it targeted U.S. based MNCs. However, due to various considerations, the U.S. has ultimately agreed to introduce three tier Transfer Pricing (TP) documentation structure suggested under Action 13 of the BEPS project w.e.f. calendar year 2017, i.e. a year later than the recommended implementation period.
One of the most important recommendation of the BEPS project is increased transparency and reporting requirements, which is introduced in Action Plan 13. This Action Plan, introduces a three-tier TP documentation structure for MNCs and the same is expected to be introduced in India w.e.f. financial year (FY) beginning April 1, 2016.
The three-tier documentation structure consists of master file, local file and a Country-by-Country (CbyC) reporting requirement. The CbyC report will be mandatory for MNCs having a global consolidated turnover of over EUR750 million i.e. approximately INR 5,000-5,500 crore. This has already been implemented in various countries like Australia, Denmark, France, Ireland, Italy, Poland, and Netherlands.
The ultimate parent company of any MNC meeting the above threshold will be required to file the CbyC report with their tax authorities, who in-turn will be required to exchange that information with all other countries where the MNC has operations. However, there may be a lower or no threshold for maintaining Master File, which actually is expected to give the entire blue-print of MNCs global value chain. The local file requirements are more or less on the same lines as TP documentation requirements currently existing under Indian TP regulations. CbyC is the new reporting standard that Indian MNC’s need to comply with. This requires crucial information of the MNCs global operations to be reported both on quantitative basis jurisdiction-wise e.g. earnings before tax, number of employees, tangible assets etc. and further qualitative basis entity-wise - main business activities e.g. R&D, marketing, manufacturing etc.
The BEPS recommendations on three tier TP documentation should be introduced with utmost care taking into account the additional burden that would be placed upon the taxpayers. As this new reporting standard will be applicable to all MNCs operating in India whether head-quartered in India or otherwise, the government should issue these new documentation rules in advance for public consultations and make this shift in a transparent and inclusive manner. This will be extremely critical, keeping in mind the efforts made by the government to change its image from being a tax aggressive to a tax-payer friendly jurisdiction.
Author is Partner and Head, Transfer Pricing at KPMG in India
The views and opinions expressed herein are those of the author and do not necessarily represent the views of KPMG in India.The Great Diwali Discount!
Unlock 75% more savings this festive season. Get Moneycontrol Pro for a year for Rs 289 only.
Coupon code: DIWALI. Offer valid till 10th November, 2019 .
First Published on Feb 23, 2016 05:10 pm