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BEPS: Big Change For Indian Tax Landscape

Published on Thu, Sep 18,2014 | 13:33, Updated at Thu, Sep 18 at 13:33Source : 

By: Rohan Phatarphekar, Partner & National Head – Global Transfer Pricing Services, KPMG In India 

Globalization of the world economy has resulted in Multinational Enterprises (‘MNEs’) shifting from country specific models to global models. These global models are usually housed in low-tax jurisdictions and are characterized by integrated supply chains or centralization of service functions. The global models led to various issues like critical under funding of public investments on account of lack of tax revenue, distortion of competition at the domestic level and issues pertaining to fairness leading to non-compliance of tax rules and regulations by tax payers.

In the changing international tax environment, a number of countries expressed their concern on how international standards allocate taxing rights between source and residence states. The G20 countries, which includes India, therefore called on the Organization for Economic Co-operation and Development (OECD) to develop an action plan to address Base Erosion and Profit Shifting (BEPS) issues in a co-ordinate and comprehensive manner.

OECD issued an Action Plan in July 2013 to prevent BEPS wherein it identified 15 specific actions considered necessary to ensure closer international cooperation, greater transparency, as well as more data and reporting requirements by MNEs. The plan recognized the importance of addressing issuing arising from digital economy and proposed to develop a new set of standards to equip governments with the domestic and international rules to prevent corporations from paying little or no taxes.

Further to the launch of this plan in July 2013, OECD has now issued certain reports and recommendations on the 7 actions points out of 15, which will aim at combating international tax avoidance by MNEs. The recommendations issued by OECD have been consented and adopted by 44 countries including all OECD member countries and G20 countries. Further many other developing countries and non-OECD and non-G20 economies have been extensively consulted in this project.

The recommendations of OECD would lead to changes in domestic tax laws, changes in bilateral treaties and international guidance’s would be issued on implementation of BEPS recommendations. India is an active member in the BEPS Project and has invested lot of time and resources in this project.  We can expect the Indian Revenue authorities to adopt the OECDs recommendations in administration of taxes once the same are formally finalized and implemented.

As stated by the OECD members in the Webcast while releasing various reports and recommendations on Tuesday, 16 September 2014, one of the most important action point is the one pertaining to the recommended format of Transfer Pricing (TP) documentation to be submitted by MNEs and businesses.

OECD has recommended an extensive 3-tier TP documentation structure to be adopted by all countries in their local Transfer Pricing regulations which will consist of:

• A Master file that consists of the MNE’s blueprint, would have to be prepared for the multinational group. The substance of the master file would include (a) The group’s organizational structure (b) A description of the group's business, intangibles, intercompany financial activities, and financial and tax position

• A Local file that would document the material transfer pricing positions of the local taxpayer with its foreign affiliates, with the goal of demonstrating the arm’s length nature of those positions. The local file would also contain the comparable analysis.

• A Country by Country (‘CbC’) Report that provides aggregate, jurisdiction-wide information on global allocation of income, taxes paid and accrued, the stated capital, accumulated earnings, number of employees and tangible assets. Further it requires details of various entities of the same group in one jurisdiction and the details of their main business activities which will portray the value chain of inter-company transactions between various group entities in different jurisdictions.

The above three documents put together will require MNEs to be consistent in their transfer pricing positions across all group entities globally. The CbC report and the master file is intended by the OECD to be used as a risk-assessment tool by the tax authorities while selecting cases for scrutiny/audit. It will enable the tax authorities to determine the most effective deployment of audit resources and provide them information to commence and target audit enquiries.

The contents of CbC report that have been proposed by OECD now, have been toned down compared to the initial proposals, based on inputs received from various countries, businesses and tax administrations. Though  OECD has done away with the requirements for detailed reporting of each entity-wise payments of interest, royalty and services fees , some emerging markets like Argentina, Brazil, China, India etc. have expressed a view that they will require additional transactional data regarding payment of interest, royalty and especially service fees also to be reported as a part of CbC report to ensure that they have information regarding global operations of MNEs headquartered outside India, which has been a challenge for them so far.

Indian Revenue has actively participated in the BEPS project is likely to implement the OECDs recommendations on various actions including the 3-tier documentation approach, by way of changes in the domestic laws. What remains to be seen is how Indian Revenue authorities implement the BEPS recommendations without triggering uncertainty and dipping investor confidence that is gradually reviving in India post formation of the new Government.

(Views expressed are personal and not necessarily of the firm)


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