The global tax community, including India, has been busy preparing and filing the CbCR (Country by Country Reports) mandated by the OECD under the much talked about BEPS (Base Erosion and Profit Shifting) project. While only large MNCs with annual turnover of over 750 million euros are currently subject to this tax requirement, the information disclosure and sharing precedent it has set internationally is unparalleled, with a distinct possibility of its scope being expanded in the future. For the uninitiated, a CbCR provides country-wise details of financial information and footprints of an MNC, irrespective of size and presence, thereby providing a snapshot to tax authorities to assess if any risks exist.
This includes employee numbers, tangible asset base, related party revenues, profit and taxes paid. The country in which the group is headquartered typically submits the CbCR to its local authorities, who then share it with other countries through automatic multilateral exchange mechanisms. The inferences that can be drawn through analysis of this data have been an eye-opener for MNCs, some of which have started considering if any realignment is required as a consequence. About 70 countries have already implemented this legislation, with another 15 countries having it in different stages of introduction. India incorporated CbCR provisions in local law in 2016. While it could be thought of as an additional standalone compliance requirement, it is worthwhile to look at it through the lens of other developments taking place globally in the international tax landscape, to draw the larger picture of how regulations are evolving.
Here, there are some emergent themes globally, that are worthwhile for consideration by India outbound groups. These can broadly be categorised under substance, digital administration and transparency. While substance and transparency were also two pillars of the OECD BEPS project, digital administration and allied regulations are currently hot topics and dynamic areas in global tax. We have subsequently discussed key updates within these themes and categories. Almost 80 countries have signed OECD’s Multilateral Instrument (MLI) that seeks to automatically amend tax treaties between signatories in order to prevent treaty abuse.
The most significant change this brings about is the addition of a Principal Purpose Test (PPT) to deny treaty benefits where the principal purpose or one of the principal purposes of a structure, transaction or arrangement, were to obtain such benefits. This exposes corporate structures, involving low-tax jurisdictions and lacking adequate commercial substance, to scrutiny and potential denial of treaty benefits. In the Indian context, it could be thought of as the treaty equivalent of General Anti-Avoidance Rules (GAAR).
Factors such as advancements in technology and search for new revenue sources have driven the shift towards digital tax administration by tax authorities. This has various facets, from electronic invoicing (e-invoicing) through government appointed or approved portals, to electronic submission of transaction level data, known as Standard Audit File for Tax (SAF-T) in OECD countries. Many measures in this spectrum have been adopted by countries in Europe and Latin America and the initiative is gathering steam in Asia-Pacific as well.
These mandatory requirements have led to real time data in possession of governments that they can use for prevention of tax avoidance, assessments and analytics. Most importantly, this means outbound companies need to have visibility and structure around data sources, formats and content delivered digitally to governments around the world. Failure on this account results in risks of increased penalties, refund delays, and reputational loss.
CbCR provisions are a key example of increasing transparency in the tax domain. To take things a step further, there is an ongoing proposal in the European Parliament for ‘public CbCR’. Should this legislation be passed, many EU as well as non-EU headquartered groups may need to draw up and publically disclose specified information, which is similar to information contained in the CbCR. At this stage, however, it is quite difficult to predict if this proposal will go through. Additionally, the UK, which happens to be in the Brexit process, introduced a requirement for certain groups to publish their tax strategies on their websites, which includes significant strategic matters like describing attitude towards tax planning and tax risks.
If the above flux in global tax is analysed collectively, it leads us to the inference that tax risk management has assumed the forefront in international tax matters going forward. There is closer scrutiny by tax departments, increased public eye due to tax fairness activism, seamless cooperation, and information exchange between governments.This means more time and thought needs to be devoted towards internal control frameworks, systems readiness and impact assessment by outbound players. Minimizing disruption in the medium term and being future proof is an imperative, given the pace of change.
India continues to be bullish on overseas investment and acquisitions, which is evidenced by recent activity such as an Indian group’s entry into the Latin American power transmission business, an acquisition in the automotive sector in Europe, or strategic investments in middle eastern oilfields.That it is an area of growing focus has also been attested to by the government with the finance minister stating in this year’s Budget that the government will bring out a refreshed outbound policy that is coherent and integrated.
What must be kept in mind, though, by current as well as potential investors—against the backdrop of the shake-up of international tax laws—is that there is a lot more than meets the eye.
By Raju Kumar
The author is Partner, International Tax Services, EY India. Views expressed are personal.