India, US sign agreement for exchanging CbC reports; how it will reduce compliance for companies

Updated: April 22, 2019 6:17:08 PM

The chairman of the CBDT in India and the US Ambassador to India signed the intergovernmental agreement (IGA) for exchanging country by country (CbC) reports.

The recent announcement by the US to build six nuclear power plants in India exemplifies the commitment of both nations to boost the bilateral civil nuclear energy cooperation.Clearly, there is significant amount of data available in the master file of each MNE with its home jurisdiction tax authorities.

By Daksha Baxi

The chairman of the CBDT in India and the US Ambassador to India signed the intergovernmental agreement (IGA) for exchanging country by country (CbC) reports as prescribed under the transfer pricing guidance on documentation of the OECD’s Base Erosion Profit Shift (BEPS) Action Plan 13, between the two countries. It will be effective for the years commencing on or after 1 January 2016.

This is a major step in the direction of resolving some of the issues identified by the OECD/ G20 initiative on BEPS. Under the BEPS Action Plan 13, CbC reporting by Multinational Enterprises (MNEs) has been prescribed. In the CbC report, the MNEs would provide annually to the tax administration of the parent jurisdiction, a host of information pertaining to each tax jurisdiction in which they have subsidiaries or branches, the revenue, profit before tax, tax paid, total employees, capital, tangible assets et al in the form of a ‘master file’. It would include information pertaining to all the Constituent Entities (CE) in different jurisdictions, high level global information regarding their global business operations and transfer pricing policies that would be available to all the relevant jurisdictions’ tax administrations. The more detailed transactional transfer pricing documentation is required to be provided in a ‘local file’ in each country.

Clearly, there is significant amount of data available in the master file of each MNE with its home jurisdiction tax authorities, which when exchanged with the local tax authorities of the CE of the MNE, enables the tax authorities of the CE to reduce their transfer pricing risk as also evasion of taxes in the local jurisdiction.

CbC reporting under BEPS Action Plan 13 applies to financial year starting 1 January 2016 and the first automatic exchanges of CbC reports took place in June 2018. There are over 2000 bilateral exchange relationships activated with respect to jurisdictions committed to exchange CbC reports. 77 jurisdictions around the world are signatories to the CbC multilateral and bilateral Competent Authority Agreement for automatic exchanges of information, including India, UK, Australia, Germany, China, France, South Africa, Mexico, Brazil, Argentina, Peru. Notably, US is not signatory to this.

Under section 286 of the Income Tax Act, 1961 (“It Act”), every CE resident in India, being a CE of an MNE and whose parent is not resident of India is required to notify the prescribed Indian tax authority whether it is the alternate reporting entity of the MNE or provide the details of the parent of the reporting MNE and their country of residence. Under the IT Act, a CE of an MNE is required to furnish the CbC report in respect of the MNE if the parent of the CE is resident in a country where inter alia with which India does not have an agreement providing for exchange of information for the CbC report. The date for filing such report was extended by the CBDT to 31 March, 2019.

As the US is not a signatory to the bi-lateral competent authority agreement for automatic exchange of information, as per the provisions of the IT Act, any subsidiary (CE) of a US based MNE would be required to file a CbC report with the Indian tax authorities, leading to a significant compliance burden. With the signing of this IGA and its effective date being from 1 January 2016, these subsidiaries of the US based MNEs would now avail the exemption from filing the CbC report and master file in India under the IT Act. They would only have to file the local file.

Thus the compliance burden of such companies would be significantly reduced. This is therefore a significant step in the direction of achieving the objective of the BEPS Action Plan 13. While it is too early to comment, it is hoped that the filing of CbC report in the US and the local files in India and access to the information of the master file under the automatic exchange under the IGA, transfer pricing concerns and major disputes on taxation of the subsidiaries of US MNEs should be curtailed.

The author is Head International Taxation, Cyril Amarchand Mangaldas. The views expressed are the author’s own.

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