Master file and CbCR: Towards global tax transparency
Keeping in mind to adopt the global best practices in the area of transfer pricing (TP), India has, over the past few years, introduced many new regimes including advance pricing agreements, safe harbour rules, secondary adjustments, range concept, thin capitalisation rules, etc.
Keeping in mind to adopt the global best practices in the area of transfer pricing (TP), India has, over the past few years, introduced many new regimes including advance pricing agreements, safe harbour rules, secondary adjustments, range concept, thin capitalisation rules, etc. The Organisation for Economic Cooperation and Development (OECD) has estimated revenue losses from base erosion and profit shifting (BEPS) conservatively at $100-240 billion annually, or anywhere from 4-10% of the global corporate income tax revenues. With a view to curtail tax losses, the Indian government, in line with OECD guidelines, has introduced a three-tier transfer pricing documentation structure, viz. Country-by-Country Reporting (CbCR), Master File regulations and existing local transfer pricing documentation.
Reporting under CBCR and Master File is made applicable from financial year 2016-17, and the first reporting needs to be done by March 31, 2018. CbCR regulations apply to those international groups whose consolidated group revenue exceeds Rs 5,500 crore (or approximately 750 million euros). Master File regulations apply if consolidated group revenue of the international group exceeds Rs 500 crore and the aggregate value of international transactions exceeds Rs 50 crore (or Rs 10 crore in case of purchase, sale, lease or use of intangibles).
Master File regulations mandate the international group to provide the overview of the international group, its business including details of intangibles, financing arrangements, top-ten lenders, top-ten debtors, and FAR (functions, assets and risk) analysis of all group entities contributing more than 10% to revenue or profits or assets. CbCR is required to be showcased in a tabular format, giving out precise information about the functions performed, assets owned, personnel employed, revenue generated, profits earned, taxes paid, capital structure, retained earnings, etc, with respect to each entity of the multinational group located in different countries across the globe. Although the rules notified in this regard provide that the Director General of Income Tax (System) shall be responsible for evolving and implementing appropriate security in relation to information furnished by the taxpayer, many multinationals considering commercial sensitivity of business details are reluctant to share because of their fear that such data may be accessible to their competitors—if proper data security systems are not in place. Many of them are willing to share information, but find it very burdensome and struggle to collate details from group entities.
Industry experts have also provided their concerns on the opening of a Pandora’s box, especially for those who have parked their profit or intellectual property in no- or low-tax jurisdictions, whereas substantial activity have been carried out in other jurisdictions in order to reduce effective group tax rates. The fear is on account of increase in litigation on this aspect, as the income-tax department may allocate group profits based on the profit split method. Whilst some multinationals are worried about compliance and legal costs (internal as well as external experts) to be spent on such a massive exercise, others have also started to simplify their complex business models in a tax-effective manner.
It would be challenging for Indian tax authorities also to create sufficient infrastructure and manpower to handle such confidential information supplied by large groups and to coordinate with different tax jurisdictions through exchange of information programmes. Going forward, it would be interesting to see the approach adopted by Indian tax authorities as the industry may welcome open-minded and rational discussions with them, instead of rigid investigative mindset adopted by them.
By Gopal Bohra & Rushabh Vora
Gopal Bohra is partner, Rushabh Vora is assistant manager, Direct Tax, NA Shah Associates
This article was originally published in Financial Express. Read the article here.