Arun Jaitley stood strong on India's commitment to BEPS, as he rose to present the Union Budget in the Lok Sabha on the leap day of 2016, stepping forward to utter the words that would change India's tax reporting scenario - Country-by-Country Reporting ('CbCR')
CbCR, as proposed in the Union Budget 2016 is broadly in line with OECD BEPS Action Plan 13 report ('the BEPS report'). The report has recommended a three-tier standardised approach i.e. preparation and maintenance of Master file; Local file and CbCR.
Objective of preparing/ maintenance of aforesaid documents is to provide tax administrations with useful information to assess transfer pricing risks, make determinations about where audit resources can most effectively be deployed, and in the event audits are called for, provide information to commence and target audit enquiries.
CbCR is a proposed annual reporting framework for multinational enterprise ('MNE') groups stipulating provision of financial data by country and by entity. CbCR in India should include:
Many countries across the world have adopted three-tiered standardised approach for CbCR in the form as provided in the BEPS report. The countries who have already introduced CbCR in their respective jurisdictions include: Australia, Denmark, France, Ireland, Italy, Mexico, Netherlands, Poland, Spain and United Kingdom. In addition to this, countries such as China, Finland, European Union, Japan, Norway, Portugal and United States have published draft CbCR legislations but not have adopted them as yet. In the near future, it will not be surprising to see many other countries adopting CbCR legislations.
CbCR shall be applicable to the MNE group of which consolidated revenues of the preceding year exceed a threshold of Euro 750 million equivalent in local currency (i.e. Rs 5,395 crore converted using exchange rate of approx. 1 Euro = Rs 72). The equivalent is to be converted basis exchange rate as on the last day of each previous year. Many countries in the world (who have enacted/proposed CbCR) have set threshold limit similar to the one prescribed by the BEPS report i.e. of Euro 750 million.
CbCR is required to be filed by:
CbCR has been proposed to be applicable in India from financial year 2016-17, if the consolidated MNE group revenue as on 31 March 2016
exceeds the threshold limit of Euro 750 million. CbCR must be furnished annually on or before the due date of furnishing the Return of Income for the relevant year. Accordingly, the first set of CbCRs is expected to be filed by November 2017.
Finance Bill, 2016 proposes penalties specifically for non-compliance with CbCR provisions. Penalty for failure to furnish the Master file and penalty for furnishing inaccurate particulars in the CbCR (subject to certain conditions) is prescribed at Rs 5,00,000 each. Further, penalty is also proposed to be levied for failure to submit CbCR by the prescribed date.
Introduction of CbCR is no doubt a right step towards aligning India's commitment to OECD's BEPS initiative. But it comes with its own set of challenges and its success will depend on how these challenges are mitigated by Indian MNEs.
CbCR provides tax authorities with a much greater level of visibility and transparency about the MNE's business. Hence, it is imperative for MNEs to ensure that the group entities performing important functions, controlling economically significant risks and contributing assets are entitled to an appropriate return reflecting the economic value creation.
In view of the ripple of change brought about by the CbCR framework, the MNEs will have to undertake risk assessment, evaluate preparedness from a reporting perspective and tie up loose ends at the earliest.
While it is heartening to see India walk shoulder-to-shoulder with developed economies in incorporation of the OECD guidelines, the implementation at ground level is where it will have to prove its mettle.
Paresh Parekh, Partner, International Tax, EY
Mukesh Bhanushali, Senior Tax Professional, EY also contributed to the article. Views expressed are personal.