To check tax evasive practices of multinational enterprises (MNEs), the OECD along with G20 countries has developed a comprehensive framework. The framework consists of 15 Action Plans that aim to ensure that the taxes paid in a country are commensurate with the business activities carried thereon.
The project also suggested that countries adopt a standardised approach to transfer pricing (TP). With an aim to build transparency, Action Plan 13 of the project recommended a three-tiered TP documentation structure for large MNEs, which includes a master file; a local file; and a country-by-country-report (CbCR).
A master file would contain details of the group and its businesses. It requires MNEs to compile description of all entities in the MNE group, its nature of business with profit drivers and supply chains; the group’s intangible assets along with R&D locations, financing structure and transfer pricing (TP) policies. A local file contains information specific to the entity in a particular country and its transactions with other entities of the group.
CbCR requires the ultimate parent entity to report the list of entities of the group in each tax jurisdiction along with description of their main business activities. It further requires specific information about each entity in the group, namely, revenues, profits, taxes accrued and paid, employees, capital and retained earnings and tangible assets for each tax jurisdiction.
The above documentation is to be submitted to the designated authorities as required under the domestic laws of the country of residence. The information so collected by authorities of each country may then be shared with authorities of other countries either automatically or upon request under specific information exchange agreements.
Keeping in view the Government’s commitment to implement OECD recommendations, Budget of 2016 introduced the three-tier documentation system. The Central Board of Direct Taxes (CBDT) on October 31, 2017, notified rules to implement and administer the compliance in relation to master file and CbCR.
The quantum of information required to be maintained and furnished by entities has considerably increased. The master file and CbCR require a more qualitative analysis compared to the current form of TP documentation generally maintained by Indian companies. It is important for entities to be mindful of this new requirement aimed at transparency and ensuring that profits are in line with the level of activities and risk undertaken.
MNE groups now have a clear roadmap for TP compliances in India. The MNEs have expressed concerns about inconsistent implementation of recommendations across the globe, resulting in interpretation challenges, requiring greater coordination across the group and resulting inconsistency in data. They have expressed their apprehensions on how the data so collected would be inconsistently interpreted by tax authorities of different countries based on their perspectives and objectives.
In case of unilateral approaches by the tax authorities of different countries, MNEs fear double taxation, unwarranted tax demands and endless tax litigations. The OECD/G20 and the Governments would need to work more cohesively towards the implementation and interpretation framework to attain the desired objectives of the project and not succumb to the tax grab entice.
The writer is Partner-Tax and Regulatory Services, BDO India