This note seeks to summarise the basic provisions related to applicability, due dates, penalties and documentation/ information requirements pertaining to Master File (MF) and Country by Country Reporting (CbCR) under the Indian Transfer Pricing (TP) provisions.
1. Background
With an endeavour that countries adopt a standardised approach to TP documentation, Action 13 of BEPS Action plan of the Organisation of Economic Co-operation and Development (OECD) provided/ recommended a 3 tiered structure consisting of (i) Master File; (ii) Local File; and (iii) Country by Country Report. The purpose/ rationale for the same was to overcome the lack of quality data on corporate taxation for measuring the fiscal and economic effects of tax avoidance, which made it difficult for authorities to carry out TP assessments and audits. Accordingly, the Action plan 13 provided a template for multinational enterprises (MNEs) to report annually and for each tax jurisdiction in which they do business the information set out therein. India, being a part of the OECD adopted the provisions relating to MF and CbCR in October 2017 by way of insertion of section 286 in the Income tax Act (the Act) for furnishing CbCR and amendment to section 92D to provide for MF.
2. Summary of Filing/ Documentation requirements (relating to MF and CbCR) under the Indian TP provisions
A summary of the TP documentation requirement with regard to MF and CbCR (Rule 10DA and Rule 10DB) read with Sections 92D and 286 of the Act is set out below:
3. Penal Implications
- Master File: Failure to furnish MF by the due date attracts penalty of INR 500,000 (approx. USD 7,500).
- CbCR: penalties relating to non-compliance with CbCR filings are set out below
1. Information requirements
Master File
The Master File needs to include a high-level overview of the MNE, covering the following topics. The MF contains some new information not otherwise provided to tax authorities (highlighted in blue).
Organisation structure – legal and ownership along with geographic location of entities.
A general description of the business including:
Important drivers of business profit.
Description of the supply chain (products / services - five largest by turnover plus those that represent more than 5% of turnover).
Important intra-group services.
Description of the main geographies of products / services identified above.
Functional analysis describing principal contributions to value creation.
Important business restructurings.
Intangibles including:
MNE’s overall strategy for the development of intangibles.
A list of important intangibles.
Important agreements relating to intangibles, including CCAs,
R&D and License agt.’s.
Transfer pricing policies related to R&D and intangibles.
Important transfers of intangibles.
Intra-group financial activity including:
How the MNE is financed.
Identification of central financing companies.
Transfer pricing polices relating to financing.
Financial and tax positions including:
Consolidated financial statement.
Unilateral APAs; and other tax rulings relating to the allocation of income.
The Indian MF requirement is more detailed than the standard BEPS Action Plan 13 content. Certain additions and modifications have been done in the rules prescribed in India. Therefore, the Indian company can utilize the MF prepared by other CEs of International group but necessary modifications and additions have to be made to align it with the Indian requirement under Form 3CEAA (Part B). The details of the modifications or additional contents in the India Format of MF is provided below:
The balance contents as mentioned in Part B of Form 3CEAA are in line with BEPS Action Plan 13 template of Master File.
Country by Country Report
The country-by-country report requires aggregate tax jurisdiction wide information relating to the global allocation of:
− the income;
− the taxes paid;
− certain indicators of the location of economic activity among tax jurisdictions in which the MNE group operates;
− listing of all the Constituent Entities for which financial information is reported, including the tax jurisdiction of incorporation, where different from the tax jurisdiction of residence, as well as the nature of the main business activities carried out by that Constituent Entity.
The information required as per Form 3CEAD (CbC report) is broadly in line with OECD BEPS Action Plan 13 template for CbC Reporting. Template of Part A and B of the India Form is provided below.
The Form needs to be signed by the person competent to verify the return of income under section 140 of the Act.
Comments