DECEMBER 04, 2017

By Tehmina Sharma, Nikhil Dhariwal and Devansh Waghela

MULTINATIONAL enterprises ('MNEs') typically enter into international transactions amongst related parties in the course of their business operations globally. Due to this, a number of countries have implemented transfer pricing (TP) regulations as anti-tax avoidance mechanisms to test such related party transactions on an arm's length basis.

TP regulations enable tax authorities to scrutinize related party arrangements with vigilance. However, the regulations provided for details which were local country specific and did not equip taxauthorities with requisite information/details to attain a broader perspective about the MNE groups' global policies, business structures and how the taxes were impacted in the countries that the MNE groups are present.

In many instances, the MNE groups have leveraged on cross-border related party arrangements to optimize and reduce their effective tax rate ('ETR') globally. Hence the need was felt to enact provisions to curb such manipulations and shifting of profits, by empowering tax authorities with intricate information about the MNE group for effective audits and risk assessment from the perspective of transfer pricing.

The G20 member countries along with the Organization for Economic Co-operation and Development ('OECD') commenced a reforming initiative called Base Erosion and Profit Shifting ('BEPS') in 2012, and released 15 final action reports in 2015. As a member of the G20 and an active participant in the BEPS initiative, India is committed to its outcome and implementation of minimum standard.

The Action Plan 13 lays down guidelines with respect to preparation and maintenance of the three-tiered TP documentation as under:

++ Master File-a business document explaining operational, intangible and financial structuring of the MNE group;

++ Country-by-Country Report ('CbyC') - entailing country-specific numerical details like revenue, taxes paid, profits before taxes among others, of companies forming a part of the MNE group; and

++ Local File - which is more or less in line with the traditional transfer pricing country-specific documentation.

With an intent to operationalize the recommendations of OECD therein, the Indian Finance Act, 2016 adopted guidance; however, the final rules were much awaited.

This article deals with key highlights of the final rules implemented in India, its demarcation from the requirements under OECD and the mandate globally and how it shall impact an Indian-headquartered or a foreign-headquartered MNE group.

The Central Board of Direct Taxes ('CBDT') on October 31, 2017 has released the final rules in this regard.

Master File:

The final Rules require a Master Fileto be prepared and filed in India if:

++ If the consolidated revenue of the international group for the accounting year exceeds INR 500 crores; and

++ The aggregate value of international transactions as per books of accounts, during the accounting year -

++ Exceeds INR 50 crore; or

++ Exceeds INR 10 crore in respect of purchase, sale, transfer, lease or use of intangible property.

The Part A (consisting of basic details about the taxpayer, international group to which it belongs, number of group entities in India and their PAN, addresses, etc.) of the Master File is required to be filed by all group entities of Indian-headquartered as well as foreign-headquartered MNE groups, whereas Part B (consisting of exhaustive and descriptive information) of Master File shall be filed only by group entities that cross the above-mentioned threshold.

As per the final regulations, Master File has to be prepared and filed with the tax authorities in a prescribed form by the due date for return of income i.e. November 30, 2017. However, 2016-17 being the first year of mandate, CBDT has extended the filing due date to March 31,2018.

While a large part of the contents of the Master File requirements as per the Indian regulations are in line with that as prescribed under the OECD BEPS framework, there are certain additional requirements and conditions which have been prescribed as under:

++ Additional burden for foreign-headquartered MNE group - The group companies of foreign-headquartered MNE group resident in India shall pose practical challenges in modifying the Master File prepared by their ultimate parent to the extent it complies with additional disclosure requirement prescribed by Indian regulations.

++ Lower threshold - India has adopted a lower threshold applicable to MNE groups for preparation of Master File and this is in line with many other countries such as Australia, Germany, China, Netherland, Spain, South Africa etc. which have adopted lower threshold for Master File.

++ Filing obligation - Indian rules require the Master File to be filed in the prescribed format as against maintenance of documentation by the India taxpayers. Countries such as Australia, Belgium, Japan, South Korea and Mexico among others have also prescribed such filing obligations.

++ Additional requirements over and above the OECD format - Indian regulations more particularly focus on extensive disclosures including around intangibles and R&D-related activities in the Master File. Some of the key disclosures to be included as part of the Master File are the following:

++ List of all important intangibles/group of intangibles along with names of legal entities that legally own such intangibles

++ List and description of important agreements among members of the international group related to intangibles, cost contribution arrangement, principal research service agreements and license agreements

++ Description of functions, assets employed and risks assumed by all entities of an MNE group constituting at least 10% of revenues or assets or profits of the international group.

Country-by-Country Report:

In respect of CbyC Report, the final rules require the CbyC Report to be filed in the prescribed form for an international group having consolidated revenue in the accounting year exceeding INR 5,500 crores (first applicable year is FY 2016-17). The CByC Report would have to be furnished either by a parent entity of the international group or the alternative reporting entity (i.e. constituent entity of the international group that has been designated by such international group, in the place of the parent entity).

The additional burden for filing of the CbyC report in India shall increase for the group companies of the foreign-headquartered MNE group; in case there is a systemic failure or absence of multilateral competent authority agreement with the country in which CbyC is filed for the exchange the CbyC Report.

The CbyC Report has to be filed by the due date of filing return of income in India i.e. by November 30, 2017. However the timelines have been relaxed similar to that of Master File for 2016-17 (they can be filed by March 31, 2018). The contents of the CbyC report in the prescribed form are in line with contents suggested by the OECD BEPS framework.

While the final rules are largely aligned to information recommended in the OECD BEPS framework for CbyC Report, the regulations pertinent to Master File are onerous in nature particularly on information requirements on intangibles, R&D and functional analysis for material entities. The MNE groups will have to collate additional information to comply with the Indian Master File requirements. Moreover, the above information would have to be collated by even medium-sized tax payers due to the lower threshold prescribed.

The filing requirement for Master File would involve extensive details of the MNE group readily available with the lower tax authorities. The requirement could have been to prepare and maintain on a contemporaneous basis and submit it on request by the tax authorities.

Lastly, since India has adopted the BEPS documentation requirement it will be imperative for Indian taxpayers to sync their transfer pricing positions as documented in the local TP report, with that of the Master File and CbyC Report.

(The article has been authored by Tehmina Sharma, Partner; and co-authored and assisted by Nikhil Dhariwal, Director and Devansh Waghela, Deputy Manager, Deloitte Haskins and Sells LLP. The views expressed are strictly personal.)