MULTINATIONAL companies in India over a certain threshold group turnover may be required to make comprehensive disclosures relating to their revenues, taxes paid, staff strength and assets in different countries where they operate from the next financial year. The move is likely to add to compliance burden of the multinationals while reducing the room for taking tax advantage.
With the OECD finalising base erosion and profit shifting (BEPS) guidelines, India is all set to introduce relevant amendments in the Income Tax Act to ensure that multi-national companies having a consolidated group revenue “over around Rs 5,500 crore, similar to what the OECD has recommended” to provide detailed information about the tax accrued, retained earnings, profit before tax, and information about the business activities its each entity engages in, a senior official told The Indian Express.
“These amendments will be introduced in the Budget 2016-17 and will be implemented in the country from April 1, 2016. India has been the most vocal supporter of the BEPS action plan. We are working to ensure that the country-by-country reporting provision gets implemented from next fiscal,” the official said.
The official said that the amendments fall under the transfer pricing documentation requirement provided by the Organisation for Economic Cooperation and Development (OECD) and G-20 nations. Tax experts however said that while it will help in ushering in transparency in transfer pricing transactions, it will force MNEs to justify the tax benefits sought by them.
“By bringing in country-by-country reporting, the MNEs will have to inform tax authorities in each country as to what kind of profitability is there, what is the main business of the company in each country, whether infrastructure and investments are commensurate to profit earnings. The additional information being sought will give a holistic understanding of the company’s operations, thereby bringing in transparency,” Daksha Baxi, executive director, Khaitan and Co, said.
However, it will lead to compliance burden on both tax administration and corporate, she added.
According to the proposed amendments in the income tax act, MNEs will have to provide information in a three-tiered way – a master file with high-level information regarding their global operations; a local file specific to India detailing information about related-party transactions and the transfer pricing determination made and; by-country report to be provided annually for each tax jurisdiction.
“The move is expected to make it difficult for companies to artificially shift income into low-tax jurisdiction and make it easy for the income tax department to identify such transactions,” the official said. India along with Brazil, China, South Africa, Mexico and Argentina, had argued that the country-by-country reporting will help them get information about related-party interest payments, royalty payments and service fees.
As per the OECD, while master file and local file has to be delivered to local tax administrations, country-by-country reporting has to be filed in jurisdiction of tax residence of the ultimate parent entity and shared between jurisidictions through automatic information exchange.
Sudhir Kapadia, partner, EY, said that the implementation will help in “easier exchange of information by providing common format and information to all countries. It will also improve transparency as multiple jurisdictions will look at the global model of the company”.