Govts globally have perhaps taken a leaf from this fable in the context of tax positions of MNEs.
A popular tale which many of us have heard is that of a group of blind men and an elephant. Each one feels a different part of the elephant, but only one part, such as the leg or the tail. The blind man who feels the leg says the elephant is a pillar; the one who feels the tail says the elephant is a rope and so on. None of them gets the correct description of the elephant, because no one has the “complete picture”.
Governments across the world have perhaps taken a leaf from this story in the context of tax positions of multinational enterprises (MNEs). Generally, tax authorities have information on the tax positions and operations of MNEs’ subsidiaries operating in their respective countries. Historically, though, tax authorities have found it difficult to get the complete picture of MNEs’ global operations. Hence, a consensus was reached in October 2015 by 44 countries—representing 90% of world’s economy—to require MNEs to provide specific information about their global taxes and operations to the parent country, in a Country-by-Country Report (CbCR). This initiative was also driven by concerns that MNEs may not be paying their fair shares of taxes in every country in which they operate.
On February 29, finance minister Arun Jaitley introduced CbCR in India through his Budget proposals. Consistent with the global norm, Indian MNEs with global consolidated revenues exceeding 750 million euros would have to file CbCR in India. Further, as regards to Indian subsidiaries of foreign MNEs—who would file CbCR in their home country—India can seek this report from the parent government under a mutual exchange of information agreement.
CbCR includes country-wise details of revenue, profits, taxes, capital, reserves, number of employees and tangible assets of MNEs. Additionally, subsidiary-wise details of country of incorporation, residence and main business activity are also covered. Indian MNEs would be required to file CbCR for FY17 and onwards by the due date for filing the income-tax return.
While implementing CbCR, finance minister Jaitley has broadly stuck to the international consensus on how CbCR has to be implemented. So we have the 750-million-euro threshold, which is followed by the world. Also, the Indian government seems to have accepted the global norm on the contents of CbCR, though specific details are yet to be notified. However, there remain three key issues surrounding CbCR.
The first issue is that of confidentiality. Considering the significant details about global operations which would be captured in this report, India must develop a mechanism to ensure that this information remains confidential. India can frame rules to ensure that only select officials in the government have access to CbCR. Any compromise on confidentiality can dent India’s image globally, and may also make foreign MNEs weary of investing in the country.
The second issue relates to preparation of CbCR. Compiling the details of global operations in a single template would surely not be easy. Different subsidiaries in a group may follow different financial years, operate in different currencies, and have varying accounting norms. Unless the manner of CbCR preparation is outlined in detail, we may see a whole lot of practical challenges on this. The government should prescribe clear rules for preparation of CbCR. As MNEs prepare for this voluminous compliance, perhaps the government should also consider waiving penalties for any defaults in the first year of implementation, provided the default only relates to the manner of CbCR preparation. Also, subsidiaries which are not required to be consolidated due to materiality may not be made part of CbCR disclosures.
The third issue relates to how CbCR would be used by the government. There is a global consensus that CbCR should be used to identify areas which require greater tax scrutiny, and not to assert tax adjustments. While the Budget Memorandum mentions this philosophy, this intention must be codified in the law. The government can develop a mechanism wherein CbCR is examined by a separate tax wing which identifies areas for detailed audit, separate from the officers actually involved in the audit.
While there is a global consensus that MNEs must file CbCR, the information contained therein needs to be reviewed in a mature way in tax audits. It is critical that MNEs are not put to hardship by way of arbitrary tax adjustments only based on CbCR, as this will hurt the investor sentiment and slow down the momentum of economic growth. CbCR is like a brahmastra—a powerful tool, which must be utilised with caution.
Finally, large companies have to start preparing for this important compliance. They have to assess whether their processes and accounting systems are geared to generate CbCR. They also need to be cognisant that CbCR will be shared with other jurisdictions in which they operate. MNEs may need to critically review their global tax positions or structures to identify and correct any potential risk areas. The time left for this compliance is relatively short, and the sooner the MNEs initiate necessary actions, the better it would be for them.
Bipin Pawar, Manish Sabharwal
Bipin Pawar is partner and Sabharwal is director, Price Waterhouse & Co LLP. Views are personal