The Union Budget is likely to spell out details regarding changes to the existing legal provisions that will enable large corporates, especially Indian multinational corporations, to adhere to the country-by-country reporting mandated under the so-called Base Erosion and Profit Sharing (BEPS) guidelines set by the Organization for Economic Cooperation and Development.
The country-by-country reporting is part of the standards that G20 governments are expected to adopt by 2017 as part of the BEPS guidelines. The norms were announced in October 2014 by the OECD to plug tax loopholes that it estimated cost countries upwards of $100 billion a year.
While the BEPS action plan introduces a three-tier transfer pricing documentation structure for MNCs (transfer pricing refers to the price at which different divisions of a company transact with each other), the same is expected to be introduced in India from April 1, 2016.
According to OECD estimates, BEPS measures will affect around 9,000 companies globally. Analysts estimate that 150-odd Indian companies would qualify for country-by-country reporting, the first key BEPS measure likely to impact corporates. Besides, the new rules would also apply to subsidiaries of multinational companies operating in India. A fineprint of the provisions, to be spelt out in the Budget, is expected to have details regarding the steps that multinational companies will have to take in order to comply with a set of new reporting requirements, in terms of what to file and how to file it, an official involved in the exercise said. Companies will have to look at the changes required in their own set up, including their accounting systems, their compliance mechanisms and the way data is reported.
The IT Department is already in advanced stages of putting in place adequate safeguards to allay concerns among firms regarding the confidentiality of reported information, with the administrative set-up being readied to protect confidentiality and ensure that the information is not misused. The three-tier transfer pricing documentation structure for multinational companies comprises a master file, a local file and a country-by-country (CbC) reporting requirement.
Further, the parent company of an MNC with a global consolidated turnover of over Euro 750 million (about Rs 6000 crore), will be required to file the CbC report with their tax authorities, which, in-turn, will be required to share that information with all countries of operation of that MNC.
“India looks all set to incorporate the provisions of Master File and CbC Reporting in its domestic tax laws vide the forthcoming Union Budget, with effect from the fiscal year beginning April 1, 2016, as communicated by various senior officials of the Indian Revenue in different public fora,” said Rahul Mitra, leader of BEPS and tax dispute resolution, at KPMG India.
Gautam Mehra, ED and leader-Tax at PwC India said that companies are gearing for the same. “They are checking if their systems are geared to provide that kind of information and also what kind of impact will it have on them. They are also trying to find out the issues that may crop up because of the same,” he said.
In his budget announcement 2016-17, Finance Minister Arun Jaitley is expected to incorporate some key provisions laid down in the action plan rolled out by OECD, in the domestic tax laws, sources indicated.
One of them, which is likely to be incorporated, relates to plugging the loophole in the bilateral tax treaties, wherein shell companies are formed to avoid paying capital gains tax, according to analysts. “The use of bilateral tax treaties to avoid capital gains taxation and obtaining beneficial withholding tax rates through use of shell or conduit companies, is intended to be plugged under BEPS, through specific anti treaty-abuse rules,” Mitra said.
A report prepared by consulting firm EY said that the Indian revenue authorities may possibly adopt some of the action steps of BEPS, especially in relation to preventing abuse of tax treaties, documentation requirements, in administering taxes during audits/assessments, etc. However, even as India looks to incorporate BEPS action plans in a bid to protect its tax base, experts say that it has to be done with some caution so that investor sentiment is not hurt.
Mitra said that that the incorporation has to be done with “a tinge of caution, so as to not to unduly hurt the momentum of economic growth, particular concerning FDIs, which are a catalysts of the Make in India initiative launched by the present government.”
Others said that since companies and investors are already preparing for meeting with the General anti-avoidance rule (GAAR) which is set to be implemented in 2017, companies are already gearing on the larger global compliance requirements.