BEPS - Impact On India Inc
Published on Wed, Jan 27,2016 | 22:20, Updated at Wed, Jan 27 at 22:20Source : Moneycontrol.com
By: Rahul Mitra, Leader- BEPS & Tax Dispute Resolution, KPMG India
As per the BEPS project, jointly initiated by OECD and G-20 countries, fifteen Action Plans were released on 5th October, 2015. BEPS predominantly impacts headquartered entities in a particular country, as the tax administrator of such country would like to ensure that profits attributable to valuable intangibles and strategic functions, which are generally owned and performed by headquartered entities, are not parked in other jurisdictions, particularly tax havens, through creation of structures or intermediary companies, without having necessary substance for deserving such profits.
Thus, in the context of India, the focus of the Indian Revenue would be more on large Indian outbound MNCs, having significant presences in overseas entities. BEPS Action Plan 13 has revised the entire Chapter relating to transfer pricing (TP) documentation of the OECD TP guidelines, to provide for robust documentation and disclosure mechanisms, which are expected to provide necessary information to tax administrators across the world, for monitoring the entire philosophy of aligning risks, rewards, value, etc with substance. Action Plan 13 has provided for a three tier structure of TP documentation, namely – (a) Master File; (b) Local Documentation File; and (c) Country by Country (CbC) Reporting.
India, being one of the pioneers of the BEPS initiative, as part of the G-20 countries, looks all set to incorporate the provisions of Master File and CbC Reporting in its domestic tax laws with effect from the fiscal year beginning 1st April, 2016, as communicated by various senior officials of the Indian Revenue in different public fora.
Master File is expected to provide an overview or blue print of an MNC group’s global business model, specifically covering the following aspects – (a) organisational structure; (b) description of the various businesses; (c) intangibles used in the businesses; (d) intercompany financial transactions; and (e) financial and tax positions.
Each Indian MNC group is encouraged to prepare the Master File as a real-life novel, depicting the overall TP policy and supply chain model for each of the businesses run by it, in a manner that any person reading the document, would understand the intercompany pricing policies adopted by the MNC group; and other important matters relevant for TP.
The CbC Reporting is required to be presented in a tabular format, setting out crisp information about the functions performed, assets owned, personnel employed, revenue generated, profits earned, taxes paid, capital structure, retained earnings, etc, with respect to each entity of the MNC group located in different countries. The CbC Reporting would highlight any possible mismatch between the level of profits or revenues residing in, or intangibles owned by, an entity of the MNC group; and the functions carried out by, or capital infused in, the said entity, thus raising an alarm for tax administrators to examine the structure in detail.
The BEPS guidelines provide for a minimum threshold of consolidated annual turnover of Euro 750 million (i.e. approximately INR 5400 crore) for MNC groups to be obliged to comply with CbC Reporting. No threshold however has been provided for the maintenance of Master File by MNC groups.
Thus, in the context of India, the Indian outbound MNC groups, particularly those having consolidated annual turnover in excess of INR 5400 crore, would need to gear up for the exercise as the requirement for compliance is expected to kick start effective 1st April, 2016. It is most critical for the Indian houses to carry out clinical analyses of their businesses to find out whether there are any exposures in terms of mismatch between risks, rewards and functions, which might not have been detected during the course of normal local TP documentations carried out thus far; and take corrective measures with respect to the supply chain models, before the new regulations get enacted with effect from 1st April, 2016, though the due date for furnishing the Master File and CbC Reporting for the fiscal year ending 31st March, 2017, is more than a couple of years away. Such Master File and CbC Reporting document, prepared by the Indian headquartered MNC shall be made available with the Revenue Administrators of all the countries where the MNC Group has footprints.
Further, thorough analyses of the overview or blue print of the organisational and operational structures, as required by Master File and CbC Reporting, would also help Indian MNCs to identify any possible exposures around tax residency rules for their foreign subsidiary companies under the new regulations of place of effective management; and mitigate any such unnecessary exposure through valid corrective measures, strictly within the four corners of law.
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