Country by country (CbC) reporting reaches Indian shores By Paresh - - PowerPoint PPT Presentation
Country by country (CbC) reporting reaches Indian shores By Paresh Parekh, Partner, EY March 2, 2016 CbC reporting BEPS Action 13 - background Contents Budget 2016 proposals Global overview Page 2 Budget Proposal 2016 CbC
By Paresh Parekh, Partner, EY
March 2, 2016
Page 2 Budget Proposal 2016 – CbC reporting
► BEPS Action 13 - background ► Budget 2016 proposals ► Global overview
Page 3 Budget Proposal 2016 – CbC reporting
Action 13 focuses on TP documentation and includes the CbC report. Large amounts of previously ‘possibly undisclosed’ data suggested to be made available to tax authorities
►
Action 13 is designed to increase transparency by providing tax authorities with sufficient information to allow them to conduct transfer pricing risk assessments and consider whether groups have engaged in BEPS-type activities.
►
It requires companies to use a consistent three-tier framework for providing information on global allocation of income, economic activity and intercompany pricing across all of a company’s global operations.
►
CbC reporting applies to multinational enterprises. Master file High-level information about the MNE’s business, transfer pricing policies and agreements with tax authorities in a single document available to all tax authorities where the MNE has operations Local file Detailed information about the local business, including related-party payments and receipts for products, services, royalties, interest, etc. CbC report High-level information about the jurisdictional allocation of profits, revenues, employees and assets
Page 4 Budget Proposal 2016 – CbC reporting
Next Steps:
► Rules for details
CbC reporting to be prescribed
When:
► Applicable from 1
April 2016 (i.e. FY 2016-17)
► CbC - Euro 750 mn
[conversion rate – last date of year]
Why: To provide tax administrations with useful information to assess transfer pricing risks. It will facilitate tax administrations to make determinations about where their resources can be most effectively deployed What’s new:
► Section 92D(1) proviso – Master file containing standardised information relevant for all multinational
enterprises (MNE) group members
► Section 286 - CbC report containing certain information relating to the global allocation of the MNE’s
income and taxes paid together with certain indicators of the location of economic activity within the MNE group
Page 5 Budget Proposal 2016 – CbC reporting
What Who When
Filing CbC report in India for every reporting accounting year [section 286(2)]
►
Indian resident which is parent entity of group (‘Indian parent’)
►
Alternate reporting entity, which is resident in India (‘Indian ARE’)
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Due date of filing return of income under section 139(1) [‘due date’] Filing of CbC report in India in special cases by due date [section 286(4)]
►
Constituent entity resident in India not being Indian parent or Indian ARE
►
India does not have agreement for exchange
parent entity of group or
►
Systemic failure of country or territory to automatically exchange CbC report
►
AND, Constituent entity is notified of failure by Indian tax authorities Exchange of CbC report through ERA between Parent country and India
►
Parent entity files CbC report in the country of its tax residence
►
CbC report to be automatically exchanged through ERA entered into between India and parent entity’s country Exchange of CbC report through ERA entered into between ARE country and India [section 286(5)]
►
ARE files CbC report in the country of its tax residence
►
Report is required to be filed in ARE country and India has ERA with ARE country
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No systemic failure of exchange of report
►
Indian tax authorities are notified about ARE by Indian constituent entity
Page 6 Budget Proposal 2016 – CbC reporting
Term Definition
Group
►
Group includes parent entity and all the entities in respect of which a consolidated financial reporting for financial reporting purposes is prepared or would have been prepared (if in case equity shares would have been listed on stock exchange)
International group
►
Two or more enterprises which are resident of different countries/territories or
►
Enterprise being resident of one country/territory carrying on business through permanent establishment (PE) in other countries/territories
Parent entity
►
Entity of the group holding directly or indirectly an interest in one or more of the
equity shares would have been listed on stock exchange) to prepare consolidated financial statements as per laws in force/accounting standards of country/territory
Constituent entity
►
Any entity of international group
► that is included in consolidated financial statement ► that is excluded from consolidated financial statement on the basis of size or
materiality
► that is PE of any separate business entity and such PE prepares separate
financial statement for financial reporting, regulatory, tax reporting or internal management control purposes
ARE
►
A constituent entity that has been designated to furnish CbC report in place of parent entity in country or territory in which such constituent entity is resident
Page 7
Budget Proposal 2016 – CbC reporting
Tax jurisd sdict iction
Revenu nues es Prof
it (loss ss) before re income me tax ax Cash Tax Paid (CIT and WHT) Current year tax accrual al Stat ated ed capit ital Accumulat ated earnin ings Tan angib ible e asse ssets s other th than cash h an and cash h equivale alents Number of employees Unrelat lated party Related party Total al 1. 2. 3. 4. 5. Tax jurisdiction Constituent entities resident in the tax jurisdiction Tax jurisdiction of
incorporation if different from tax jurisdiction of residence Main business activity(ies) R & D Holding or managing IP Purchasing or procurement Mfg or production Sales, marketing
Admin., Mgmt or support services Provision of services to unrelated parties Internal group finance Regulated financial services Insurance Holding shares
instruments Dormant Other
1. 2. 3. 1. 2.
Table le 1:
Table e 2:
Page 8
Budget Proposal 2016 – CbC reporting
Organization structure Business description Intangibles Intercompany financial activities Financial and tax positions
Structure chart: Important drivers of business profit Overall strategy description Financing arrangements for the group Annual consolidated financial statements
► Legal
► Geographic
location Supply chain of:
► 5 largest products/services by
turnover
► Products/services generating
more than 5% of turnover List of important intangibles and legal owners Identification of financing entities List and description of existing unilateral Advance Pricing Agreements (APAs) and other tax rulings Main geographic markets of above products List of important intangible agreements Details of financial transfer pricing policies List and brief description of important service arrangements R&D and intangible transfer pricing policies Functional analysis of principal contributions to value creation by individual entities Details of important transfers Business restructuring/ acquisitions/ divestitures during fiscal year
Page 9
Budget Proposal 2016 – CbC reporting
MNCs Upfront notification Annual filing Inbound MNCs
international group; or
the ARE of the international group and the country and territory of which the said entities are resident
ARE or in cases of failure of exchange mechanism Outbound MNCs
Page 10
Budget Proposal 2016 – CbC reporting
►
Data collection in respect of each country in which Indian MNE group has
►
Availability of software/ERP database packages?
►
Mapping data in respect of PEs separately
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Identification of outliers in advance and entity structure rationalization, if required
►
Consistency
►
Sustainability
►
Higher degree of scrutiny by transfer pricing authorities to check consistency in transfer pricing policy of MNE group across countries
►
Accounting seconded employees and contract workers?
►
Accounting of joint ventures and special events like assets or entity disposals?
►
Regular check on Action 13 implementation by different countries to avoid mismatch/non-compliance
Page 11
Budget Proposal 2016 – CbC reporting
► Higher degree of scrutiny by transfer pricing authorities on account of
end to end transparency in respect of revenue and profit allocation
► Enhanced risk of attempt by transfer pricing authorities applying profit
split method to allocate higher amount of profits to India
► Increase in compliance burden for MNEs investing in India ► Potential value chain transparency and business strategy disclosure
► Place and contribution of Indian entity in entire value chain? ► Potential disclosure of unilateral Advance Pricing Agreements (APAs)
signed by taxpayer in different countries (as per master file requirements given by OECD)
► Indian tax authorities may demand consistency in pricing across
the group
► May influence the APA negotiation process in India
Page 12
Budget Proposal 2016 – CbC reporting
Regional principal Global IP owner Local distributors Local distributors Local distributors IP Finished goods Royalties Payment 10% of system profits 50% of system profits 40% of system profits
►
Today- local jurisdictions only see local transactions – e.g. is distributor appropriately remunerated?
Page 13 Budget Proposal 2016 – CbC reporting
Nature of penalty Penalty Failure to furnish the master file by prescribed date Rs 500,000 Furnishing inaccurate particulars in the CbCR (subject to certain conditions) Rs 500,000 Failure to submit CbCR by the reporting entity a) Where period of failure ≤ 1 month b) Where the period of failure > 1 month c) Continuing default after service of penalty order Rs 5,000 per day Rs 15,000 per day
Failure to respond within 30 days to CbCR related queries [extendable by max 30 days] Rs 5,000 per day upto service of penalty
Page 14 Budget Proposal 2016 – CbC reporting
Spain: mandatory for groups larger than €45 million Singapore and Greece have already implemented documentation requirements similar to Action 13 master file and local file.
Already implemented Implementation in progress Status
Poland: master file mandatory for entities larger than €20 million, local file more than €10 million
Page 15 Budget Proposal 2016 – CbC reporting
► Around 16 Countries have introduced proposals/laws in their local
regulations to implement CbC reporting
► European Union (EU) has introduced draft anti-BEPS directive and
anti-avoidance package which contains CbC reporting
►
EU countries will need to give effect to the directive by introducing CbC reporting in their local tax legislations
► On 27 January 2016, 31 countries signed the Multilateral Competent
Authority Agreement on the Exchange of Country-by-Country Reports (MCAA – CbC)
►
US has proposed CbC regulations but has not signed MCAA –CbC
►
On signing MCAA-CbC may act as ERA for Indian tax purposes
Page 16 Budget Proposal 2016 – CbC reporting
OECD Australia China Denmark Finland France European Union Status Adopted legislation on 3 December 2015, to take effect as
2016. Draft legislation published Bill approved by parliament on 18 December 2015, to take effect as of 1 January 2016. Draft bill published on 21 December 2015. Bill approved by parliament on 18 December 2015, to take effect as
2016. Proposal for changes to the Directive on Administrative Cooperation published on 28 January 2016. Who Ultimate Parents of group with revenue
Threshold of AUD 1 billion (approximately EUR 670 million) Threshold of RMB 5 billion (approximately EUR 705 million) Threshold of DKK 5.6 billion (approximately EUR 750 million)
When For fiscal years starting in 2016, with filing within 12 months from fiscal year end
To be filed together with the annual tax return (due 31 May). Possible to apply for an extension.
The government intends for the provisions to be enacted and effective beginning of 2017.
Secondary filing rule 1.Local filing or 2.Filing by named “Surrogate Parent” entity
Local filing
Local filing
Penalties Left to countries General penalty for non compliance General penalty regime. General penalty regime. Penalties in the maximum amount
Specific penalty
not exceed EUR 100,000 At the discretion of Member States, must be effective, proportionate and dissuasive.
Consistent with OECD recommendations Local filing may be only for the local entities and its subsidiaries
Page 17 Budget Proposal 2016 – CbC reporting
OECD Ireland Italy Japan Mexico Netherlands Status Adopted legislation applicable as of 1 January 2016 Published legislation in the Official Gazette on 30 December 2015, to apply as of 1 January 2016. Draft legislation published on 16 December 2015. Published legislation
2015, to apply as of 1 January 2016. Published legislation in the Official Gazette
2015, to apply as of 1 January 2016. Who Ultimate Parents of group with revenue
Revenues in excess
(approximately US$820 million) Revenues in excess
(approximately EUR 650 million)
When For fiscal years starting in 2016, with filing within 12 months from fiscal year end
Proposed to apply to taxable years beginning on or after 1 April 2016
Secondary filing rule 1.Local filing or 2.Filing by named “Surrogate Parent” entity
Local filing
Penalties Left to countries Penalty applicable for not complying with tax return
Specific penalty between €10,000 and €50,000 may apply. General penalties and presumptive taxation may apply in case of non- compliance. In addition to penalties, non compliant taxpayers may be disqualified from entering into contracts with the Mexican public sector. Criminal penalty for non compliance possible.
Consistent with OECD recommendations Local filing may be only for the local entities and its subsidiaries
Page 18 Budget Proposal 2016 – CbC reporting
OECD Norway Poland Portugal Spain United Kingdom United States Status Published draft legislation for consultation on 2 December 2015. Adopted regulations applicable as of 1 January 2016. Draft law published on 5 February 2016. Adopted implementing regulations applicable as of 1 January 2016. Implementing regulations published 26 February 2016, to enter in force on 18 March 2016. Proposed regulations published on 21 December 2015. Who Ultimate Parents of group with revenue
Revenues in excess of NOK 6.5 billion (approximately USD 730 million)
Revenue of $850 million or greater When For fiscal years starting in 2016, with filing within 12 months from fiscal year end First reporting should be done in 2018 based on figures from 2016.
For taxable years beginning on or after the date final regulations are published Secondary filing rule 1.Local filing or 2.Filing by named “Surrogate Parent” entity
None
Local filing
None Penalties Left to countries General penalty for non compliance. General penalty for non compliance with reporting
Specific penalty for not filing the report, as well as
penalties may apply. General penalty for non compliance with reporting
Specific penalty for non compliance General reporting-related penalties may apply
Consistent with OECD recommendations Local filing may be only for the local entities and its subsidiaries
Page 19 Budget Proposal 2016 – CbC reporting
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