Country by Country Reporting – Any contours?
Transfer pricing (TP) issues have never been such a critical part of the global economic agenda as they are today. Following the release of the report addressing Base Erosion and Profit Shifting (BEPS) in February 2013, OECD and G20 countries (including India) adopted a 15-point Action Plan to address BEPS circumstances.
One of the action items, Action 13 (Transfer pricing documentation and country-by-country reporting), discusses detailed TP documentation requirements. It entails a three-tiered approach to TP documentation and Country by Country (CbC) reporting, which consists of a ‘master file’; country specific ‘local file’; and CbC reporting document. These new reporting requirements are to apply to MNCs with annual consolidated group revenue equal to or exceeding 750 million euro (hereinafter referred to as ‘covered taxpayers’).
Senior officials of the Indian Revenue at different public forums have indicated that India will implement the changes suggested in Action 13 on TP documentation and CbC reporting with effect from the fiscal year beginning 1 April 2016. The threshold for application of CbC reporting may be retained by India at turnover of Rupee equivalent of 750 million euro (Rs 5,500 crore approximately). In summary, the CbC reporting would require taxpayers to disclose information on the lines of geographical split of income from related and unrelated parties, headcount, location of key business activities (R&D, manufacturing, sales, procurement, etc., ownership of tangible and intangible assets by various group entities, and taxes paid in each geography amongst others.
Given the large volume of data to be disclosed under the CbC reporting requirements, covered taxpayers would be faced with a herculean task of collating this data, some of which may need to be collated manually. Thus, the government must provide clear rules in the beginning of the year itself, to avoid any loss of time in complying with the reporting requirements.
Since most of the data required to be disclosed in CbC reporting document will be confidential and strategic in nature, the government must build and indicate sufficient safeguards such as limiting the number of people to whom CbC report would be available, plus central storage of the report and security around it.
The CbC report is supposed to be a tool for risk assessment for tax authorities. It would help build investor confidence if it is clarified in the law or by way of a circular that if CbC reporting is the sole basis for a TP adjustment then the Indian Competent Authority would surrender such adjustment under Mutual Agreement Procedure.
As an additional measure, the government may also consider setting up of a committee of senior India Revenue officials, which must approve sharing of CbC report data and findings to the field officers. This would encourage the use of CbC report as a risk assessment tool.
While taxpayers will have a daunting task of preparing the CbC report, recommendations discussed above on timing of rules, and confidentiality and manner of usage of data would prove to be the confidence building contours that will allay their concerns.