India implications of BEPS and the impact on MNC

Suchint MajmudarThe OECD has lived up to its promise of delivering on the 15 BEPS Actions, within the predetermined timeframe of 2 years. The commitment of the G20 makes this project an especially inclusive one, and this is made distinctive by the proposed, one-of-a-kind multilateral instrument. At the outset, BEPS actions are, by definition, intended to eliminate double non-taxation and accordingly built on the pillars of coherence, transparency and substance. Further, the BEPS actions have varied timeframes of implementation, because some of them are recommendatory and others provide a minimum standard. To this end, for instance, transfer pricing actions being incorporated in the OECD guidelines with immediate effect, could go live forthwith, whereas measures such as Controlled Foreign Corporations, would have to be specifically legislated in domestic law. Yet others could be given effect to via the multilateral instrument, such as those relating to exchange of information around mutual agreement procedures and harmful tax practices.In India, we are largely impacted by the actions based on the pillars of substance and transparency. And therefore, we could expect to see the following changes in Indian legislation [mostly via circulars a la the R&D circular (Circular 6/2013), or rules]:1. Documentation changes to incorporate the 3-tier documentation, including the formats and thresholds for country-by-country reporting (‘CBCR’).2. Clarification on Risk – In particular, the aspect of exercising control on risk and the financial capacity to assume risk. At the moment, the legislation focuses particularly heavily on functional analysis; this is expected to be buttressed with plugging gaps around risk-free or low-risk entities (eg captive contract service providers, or limited risk distributors).3. Commodity pricing - Whereas commodity price can be used as the sixth method, guidance to specifically use commodity pricing as the default, most appropriate method. 4. Hard to value intangibles and cost contribution arrangements (“CCAs”) - No rules currently exist for CCAs. Guidance can be expected for the operation of CCAs, buy-in payments, commensurate-with-income rule and ex-post valuation as presumptive evidence about the appropriateness of ex-ante pricing arrangements under the arm’s length principle in case of hard to value intangibles. 5. Low value services - This is a contentious matter but the Government can certainly issue guidance by accepting the types of low value services and setting out what kind of documentation would be expected to be maintained, as also establish a ‘safe harbour’ threshold beyond which audits of such charges would be conducted.6. Marketing intangibles - The BEPS guidance for setting off a lower purchase price against the marketing spend and the concept of attaching value to the distribution rights (being distinct from the service fee towards brand building) could lead the Revenue to issue much-needed instructions.Multinationals in India could also expect to witness legislative and treaty changes in respect of introduction of Controlled Foreign Corporation rules (that could serve as the other side of the coin; one being the Place of Effective Management), anti-abuse or General Anti-avoidance rules and permanent establishment, in particular by restricting the definition of preparatory and auxiliary activities, and the recourse to dispute resolution and correlative relief under the treaty without riders.Audits/ APAs: Multinationals could anticipate that audits and APAs will become more onerous in the post-BEPS world. For instance, a combination of several factors could take away the normal recourse to adoption of Indian entity as the tested party and benchmarking with Indian comparables. a) CBCR that will demonstrate the intensity of human capital in each country by headcount and activity profileb) Clarity on capital and risk, i.e. the mere provision of capital would only allow for a risk-adjusted financial return. This could mean that all of a sudden, the hitherto so-called principal company or entrepreneur is now taken as the tested party, with residual returns or part thereof expected to come to India.c) Focus on conduct, instead of contract - India is already ahead on this curve, disregarding contracts and looking for documentation substantiating the functions performed. This is expected to only increase further, with site visits and questions being asked around actual transactions and consideration of realistically available alternatives.Together, they would imply that the profit that, based on traditional benchmarking analysis, lies beyond India, could be re-allocated to India based on the above measures, leading to potentially more complex analysis of the foreign entities. The fact that economic ownership as opposed to legal ownership of intangibles is emphasised [that supplements the R&D circular (Circular 6/2013)], could mean that the process of intangible development (e.g. software) will be more closely watched.This is bound to immediately lead to an increase in disputes world over, until the scepter of double taxation raises its head and taxpayer rights assume significance so as to restore normalcy in the world fiscal order. The author is partner, BMR & Associates LLPViews are personal