BEPS rules to be made compulsory from 1 April

India to change laws in Union Budget to make country-by-country reporting mandatory for Indian multinationals

New Delhi: India will change laws in the upcoming budget to make country-by-country reporting mandatory for Indian multinationals to ensure they follow so-called base erosion and profit shifting (BEPS) guidelines.

The norms were announced in October last year by the rich nations’ club Organization for Economic Cooperation and Development (OECD) to close tax loopholes that it estimated cost countries upwards of $100 billion a year.

The government’s move will impact all Indian companies with significant cross-border operations and with an annual consolidated global revenue of more than €750 million (around Rs.5,500 crore)—the threshold prescribed by the OECD which India plans to adopt.

These norms will have to be followed by Indian companies from the financial year that begins on 1 April.

“The budget should contain the necessary provisions that will enable country-by-country reporting. The provisions will explain what Indian multinational firms will have to do to meet the reporting requirements. That is, what to file and how to file,” Akhilesh Ranjan, the government’s competent authority in foreign tax matters, said at a conference organized by the consulting firm KPMG.

“Subsidiaries of foreign companies also have to file some documentation,” he said.

Ranjan said the government will put in place sufficient safeguards by the end of this year to protect the confidentiality of the information that companies share with the income-tax department.

“We are putting in place systems to ensure that adequate safeguards will be put in. The administrative set-up has to be readied to protect confidentiality and ensure that the information is not misused,” said Ranjan, who is also a joint secretary in the foreign tax and tax research wing of the income-tax department.

He was allaying concerns expressed by companies about the confidentiality of the data that they furnish to the tax department.

Country-by-country reporting is part of the minimum standards that governments are expected to adopt by 2017 as part of BEPS.

The exercise will provide local tax authorities information about the entire operations of a company and reveal if the company is shifting its profits to a low-tax jurisdiction to evade taxes where they are due.

“Today, under transfer-pricing regulations, you have to disclose transactions of the Indian company with a foreign subsidiary. But now you have to even mention transactions that two foreign subsidiaries have with each other,” said Rahul Mitra, partner and head, BEPS and tax dispute resolution, KPMG in India.

“So you have to provide the entire blueprint of the global operations, whether or not it directly impacts India, so that the tax department gets the complete overview of the business,” he added.

Ranjan said India is still looking at some of the other OECD recommendations but will implement them only after studying the implications on Indian companies and foreign direct investment coming into India.

“Interest deduction or the CFC (controlled foreign corporation) rules are recommendations for which there are no specified time limits. Countries have been given a lot of flexibility in the structure of those rules as well as the time that they can take. We have to examine these issues very carefully,” he said.

Provisions on interest deductability require that only interest payments as a certain percentage of the earnings before interest, tax, depreciation and amortization are permitted to be deducted from profits. But this provision will adversely hit Indian companies saddled with high amounts of debt.

CFC rules are aimed at ensuring that companies do not evade taxes by transferring profits to low-tax jurisdictions. India already has a similar version in the Place of Effective Management rules, or PoEM, announced in the last budget.

“Indian businesses have different characteristics compared to companies in Europe and the US. Interest deductability has to be understood in the context of inbound investments. It is not a question of whether we will do it but when we will do it,” Ranjan said.