Imagine a world where Indian tax authorities can look at a document to see whether a Multi-Nationals company is paying taxes commensurate to the profit it generates in India.
The genesis of such a world lies in OECD’s Base Erosion and Profit Shifting Project. Back in 2015, the Organisation for Economic Co-operation and Development had announced an action plan to document global transfer pricing information, that is, the price at which entities within a group transact with each other. The action plan had provided for documenting this information in a Master File and a Country-by-Country report.
Though India had adopted this action plan in the Finance Act last year, it’s only now that the tax department has issued draft rules for it.
The OECD intended to change the nature of tax audits from an approach where tax authorities were restricted to one or two territories to a more global one, that is, looking at a group as a whole, Vijay Iyer, a partner heading the transfer pricing practice at EY India said.
The OECD’s BEPS plan, by definition, sets out to restrict the ability of multinational companies to utilise tax havens with no significant operations for profit shifting and erosion of tax base of countries with substantial operations. Vijay Iyer, Partner-Transfer Pricing, EY India
Making Of The Master File
All multinational groups, with operations in India, will need to maintain a Master File that includes information on its operating entities in the country, their addresses etc. But exhaustive information has to be documented by those where –
- Consolidated revenue for the previous accounting year exceeds Rs 500 crore.
- Value of international transactions of the Indian entity exceeds Rs 50 crore or those relating to intangible assets exceed Rs 10 crore.
The proposed turnover threshold may mean that relatively small foreign multinational groups would need to prepare and submit the Master File for their global business operations in India, even though several of them may not be required to prepare it under the laws of the countries where they are headquartered, Rahul Mitra, a partner leading the transfer pricing practice at KPMG India told BloombergQuint.
Additionally, the draft rules need to be tightened to expressly convey that for the purposes of the Rs 50-crore threshold, only transactions impacting taxability in India will be considered, he added.
The standalone definition of international transaction, covers transactions even between two non-residents, which, in a hypothetical scenario, may involve transactions not having any impact on taxability in India. Surely, such cannot be the intent of the CBDT. Yet one may need to bring this to the notice of the CBDT as part of the recommendations, to iron out any doubts in this regard. Rahul Mitra, Partner-Transfer Pricing, KPMG India
What Goes In The Master File?
A Master File will need to capture:
- A list of all the operating entities of the international group along with their addresses.
- Functions performed, assets employed and risks assumed by those entities worldwide that contribute at least 10 percent to the group’s revenues, assets and profits.
- Details of entities of the group engaged in development and management of intangibles.
- Transfer pricing policies for inter-company financial activities.
- Details about cost allocation arrangements..etc.
The multinational group can either submit this information to the tax department itself or appoint its Indian entity to do so.
Some of this information exceeds OECD requirements, said a note by consultancy firm Nangia & Co. The additional requirements focus 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, it pointed out.
Contours Of The Country-By-Country Report
Multinational companies with consolidated group revenue of Rs 5,500 crore will be required to submit a country-by-country report. This could either be filed by the global parent or its Indian entity.
The report will require companies to provide the details of the main business activity of group entities and jurisdiction-wise information on
- profit and loss before tax
- income tax paid and accrued
- stated capital and accumulated earnings
- number of employees
- tangible assets
These requirements are in line with OECD’s action plan but there are several areas, relevant for Indian headquartered multinational groups, which have not been addressed in the draft rules, Mitra said.
Some of the open areas are different year-endings of the Indian parent company and the overseas subsidiary companies, reconciliation of data of overseas subsidiary companies with consolidated financials of Indian parent company, different accounting standards followed by the overseas subsidiary companies and the Indian parent company etc. Rahul Mitra, Partner- Transfer Pricing, KPMG India.
If the tax department does not expressly address these issues, taxpayers will have to rely on the OECD’s guidance.
Once the final rules are notified, the tax department will be able to dive deep into the business models of multinational groups, Iyer said. Transfer pricing assessments could then shift from a transaction threshold basis to a risk-based approach, he added.