Base erosion and profit shifting protocol: Small firms may get relief
The threshold could be R5,400 crore of annual consolidated group revenue for the purpose of country-by-country reporting
Not more than 120 India-headquartered firms — along with their global associates — are likely to be impacted by the base erosion and profit shifting (BEPS) protocol once it is implemented, as the government is mulling a monetary threshold for its enforcement. The threshold, sources said, could be 750 million euros (R5,400 crore) of annual consolidated group revenue for the purpose of country-by-country (CbC) reporting.
The move comes at a time when the industry is seeking flexibility when it comes to adhering to the OECD-compliant BEPS action plan, which comprises 15 areas pertaining to several tax practices and domestic taxation, in addition to ways to curb abuse of double taxation avoidance agreements.
“Considering that India is still a developing economy, it would not be fair to burden all taxpayers with onerous transfer pricing documentation requirements in the form of a master file. The CBDT may need to prescribe a reasonable monetary threshold for preparation and filing of master file so that small and medium-sized Indian multinational enterprise (MNE) groups do not suffer additional compliance burden,” said Rahul Mitra, partner and head (BEPS and tax dispute resolution) at KPMG in India. The global consultation firm has submitted a series of recommendations on the BEPS action plan to the finance ministry.
While several firms below the threshold would not come under the ambit of CbC reporting, there was, however, no clarity on whether the government would prescribe such a size limit for preparation and filing of the master file, another BEPS requirement.
The Finance Act 2016 has introduced the concepts of master file and CbC reporting in the Indian transfer pricing regulations from the current financial year. These are in line with BEPS action plan 13. The Central Board of Direct Taxes (CBDT) is expected to come up with detailed rules for master file and CbC reporting. The industry has concerns over confidentiality of data, difference in year-ending of Indian parent firm and overseas subsidiaries, different accounting standards and currency of foreign financial data when it comes to meeting BEPS guidelines.
Mitra said that the Indian parent might be unnecessarily subjected to additional compliance burden, requiring spending of significant cost and time, if the accounts of all its foreign subsidiaries are required to be recast with reference to Indian financial year of April 1 to March 31. At the same time, the Indian parent firm should not be required to undertake adjustments with respect to differences in ‘accounting principles’ applied by subsidiaries in different countries to bring them in line with Indian accounting standards, he said.
“We suggest that the CBDT should provide clarity that the financial data with respect to the various overseas subsidiary company should be translated to Indian rupees at the average exchange rate for the relevant financial year stated in the CbC report,” Mitra explained.
The CBDT is also expected to put in place necessary safeguards while preparing the master file for maintaining confidentiality of information with the group, concerning operational verticals, spread across more than one step down structure.
While New Delhi maintains that it has no plan to abandon the BEPS action plan, experts point out that with the ongoing revision of bilateral tax treaties that would help in curbing treaty abuse, the key objectives of BEPS would anyway be met and taxpayers would be left with fewer options to take unfair advantage of differences across jurisdictions.