Furnishing of report in respect of international group in line with BEPS action plan – Country-By-Country Report and Master file [New Section 286] Related amendment in sections: 92D, 271AA, 271GB & 273B Effective from: A.Y.2017-18

Furnishing of report in respect of international group in line with BEPS action plan – Country-By-Country Report and Master file [New Section 286]

Related amendment in sections: 92D, 271AA, 271GB & 273B

Effective from: A.Y.2017-18

(i) Transfer Pricing provisions under the Income-tax Act, 1961:

Chapter X of the Income-tax Act, 1961 comprising sections 92 to 92F contain provisions relating to transfer pricing regime.

Section 92D requires maintenance of prescribed information and document relating to the international transaction and specified domestic transaction.

(ii) Requirements as per OECD report on Action 13 of BEPS Action Plan: The report provides for:

(1) revised standards for transfer pricing documentation; and

(2) a template for country-by-country reporting of income, earnings, taxes paid and certain measure of economic activity.

(iii) Three-tier structure mandated by BEPS:

The BEPS report recommends that countries adopt a standardised approach to transfer pricing documentation; it mandates the following three-tier structure:-

	Document	Information
(1)	Master File	Standardised information relevant for all multinational enterprises (MNE) group members
(2)	Local file	Specific reference to material transactions of the local taxpaye
(3)	Country- bycountry Report	Information relating to the global allocation of the MNE’s income and taxes paid; and Indicators of the location of economic activity within the MNE group.

(iv) Advantages of the three tier structure [as per BEPS Report]:

(1) Taxpayers will be required to articulate consistent transfer pricing positions;

(2) Tax administrations would get useful information to assess transfer pricing risks;

(3) Tax administrations would be able to make determinations about where their resources can most effectively be deployed, and, in the event audits are called for, provide information to commence and target audit enquiries.

(v) Country-by-country Report : Reporting Requirements of MNEs

The Country-by-Country (CbC) report has to be submitted by parent entity of an international group to the prescribed authority in its country of residence. This report is to be based on consolidated financial statement of the group.

(1) MNEs have to report annually and for each tax jurisdiction in which they do business:

(a) the amount of revenue;

(b) profit before income tax; and

(2) MNEs have to report their total employment, capital, accumulated earnings and tangible assets in each tax jurisdiction.

(3) MNEs have to identify each entity within the group doing business in a particular tax jurisdiction and provide an indication of the business activities each entity engages in.

(vi) Master File: Objective & Features

(1) The master file would provide an overview of the MNE groups business, including:

(a) the nature of its global business operations,

(b) its overall transfer pricing policies, and

in order to assist tax administrations in evaluating the presence of significant transfer pricing risk.

(2) The master file is intended to provide a high-level overview in order to place the MNE group’s transfer pricing practices in their global economic, legal, financial and tax context.

(3) The master file shall contain information which may not be restricted to transaction undertaken by a particular entity situated in particular country.

(4) Thus, information in master file would be more comprehensive than the existing regular transfer pricing documentation.

(5) The master file shall be furnished by each entity to the tax authority of the country in which it operates.

(vii) Implementation of international consensus in India :

India is one of the active members of BEPS initiative and part of international consensus. For the purpose of implementing the international consensus, a specific reporting regime in respect of CbC reporting and also the master file has been incorporated in the Income-tax Act, 1961. The essential elements have been incorporated in the Income-tax Act, 1961 while remaining aspects would be dealt with in detail in the Income-tax Rules, 1962.

(viii) Elements relating to CbC reporting requirement and related matters which have been incorporated in the Income-tax Act, 1961 [New Section 286]:—

(1) the reporting provision shall apply in respect of an international group for an accounting year, if the total consolidated group revenue as reflected in the consolidated financial statement (CFS) for the accounting year preceding such accounting year is above a threshold to be prescribed [Sub-section (7)].

(2) the parent entity of an international group or the alternate reporting entity, if it is resident in India shall be required to furnish the report in respect of the group to the prescribed authority for every reporting accounting year, on or before the due date of furnishing of return of income under section 139(1) for the relevant accounting year for which the report is being furnished, in the prescribed form and manner [Sub-section (2)];

(3) the parent entity shall be an entity which is required to prepare consolidated financial statement under the applicable laws or would have been required to prepare such a statement, had equity share of any entity of the group been listed on a recognized stock exchange in India;

(4) every constituent entity resident in India, of an international group having parent entity that is not resident in India, shall notify the prescribed income-tax authority on or before the prescribed date –

(i) whether it is the alternate reporting entity of the international group; or

(ii) the details of the parent entity or the alternate reporting entity, if any of the international group, and the country of territory of which the said entities are resident [Sub-section (1)].

(5) the report shall be furnished in prescribed manner and in the prescribed form.

(6) It should contain aggregate information in respect of:

(i) the amount of revenue,

(ii) profit and loss before income-tax,

(iii) amount of income-tax paid and accrued,

(iv) details of stated capital, accumulated earnings, number of employees, tangible assets other than cash or cash equivalent in respect of each country or territory along with details of each constituent’s residential status, nature and detail of main business activity and any other information as may be prescribed.

This shall be based on the template provided in the OECD BEPS report on Action Plan 13 [Sub-section (3)];

(7) A constituent entity of an international group resident in India, shall be required to furnish CbC report to the prescribed authority if the parent entity of the group is resident ;-

(a) in a country with which India does not have an arrangement for exchange of the CbC report; or

(b) there has been a systemic failure of the country or territory i.e., such country is not exchanging information with India even though there is an agreement; and

(8) If there are more than one such constituent entity of the same group in India, then the group can nominate (under intimation in writing on behalf of the group to the prescribed authority), then, one constituent entity that shall furnish the report on behalf of the group. This entity would then furnish the report [Proviso to sub-section (4)];

(9) If an international group, having parent entity which is not resident in India, had designated an alternate entity for filing its report with the tax jurisdiction in which the alternate entity is resident, then the entities of such group operating in India would not be obliged to furnish report if the report can be obtained under the agreement of exchange of such reports by Indian tax authorities [Sub-section (5)];

(10) The prescribed authority may call for such document and information from the entity furnishing the report as it may specify in notice for the purpose of verifying the accuracy. The entity shall be required to make submission within thirty days of receipt of notice or further period if extended by the prescribed authority, but extension shall not be beyond a further period of 30 days [Subsection (6)];

(ix) Penalty for non-furnishing of the report by any reporting entity which is obligated to furnish such report [Section 271GB(1) & (3)]:-

	Period of delay/default	Penalty
(1)	Not more than a month	Rs. 5,000 per day
(2)	beyond one month	Rs.15,000 per day for the period exceeding one month
(3)	Continuing default even after service of order levying penalty either under (a) or under (b)	Rs. 50,000 per day of continuing failure beginning from the date of service of order

(x) Penalty for failure to produce information and documents within prescribed time [Section 271GB(2) & (3)]:-

Default

Penalty

(a)

Failure to produce information before prescribed authority within the period allowed u/s 286(6)

` 5,000 per day of continuing failure, from the day immediately following the

day on which the period for furnishing the information and document expires.

(b)

Continuing default even after service of penalty order

` 50,000 per day for the period of default beyond the date of service of penalty order

(xi) Penalty for submission of inaccurate information in the CBC report [Section 271GB(4)]:

If the reporting entity has provided any inaccurate information in the report, the penalty would be ` 5,00,000 if ,-

(a) the entity has knowledge of the inaccuracy at the time of furnishing the report but does not inform the prescribed authority; or

(b) the entity discovers the inaccuracy after the report is furnished and fails to inform the prescribed authority and furnish correct report within a period of fifteen days of such discovery; or

(c) the entity furnishes inaccurate information or document in response to notice of the prescribed authority under section 286(6).

(xii) Non-levy of penalty if reasonable cause for failure is proved [Section 273B]:

Section 273B provides for non-levy of penalty under various sections if the assessee proves that there was reasonable cause for such failure. Section 271GB has been included within the scope of section 273B. Therefore, the entity can offer reasonable cause defence for non-levy of penalties mentioned above.

(xiii) Maintenance and furnishing of Master file: Consequent amendments in the Income-tax Act, 1961:

	Default	Penalty
(1)	Proviso to section 92D(1)	A person being constituent of an international group shall, in addition to the information related to the international transaction required under section 92D(1), also keep and maintain such information and document in respect of the international group to be prescribed by way of rules. The rules shall, thereafter, prescribe the information and document as mandated for master file under OECD BEPS Action 13 report;
(2)	92D(4)	The information and document shall also be furnished to the prescribed authority u/s 286(1) within such period as may be prescribed and the manner of furnishing may also be provided for in the rules
(3)	271AA(2)	For non-furnishing of the information and document to the prescribed authority, a penalty of ` 5 lakh shall be leviable.
(4)	273B	Reasonable cause defence against levy of penalty shall be available to the entity.

(xiv) Threshold limit of consolidated group revenue for applicability of CbC reporting requirement:

As indicated above, the CbC reporting requirement for a reporting year does not apply unless the consolidated revenues of the preceding accounting year of the group, based on consolidated financial statement, exceeds a threshold to be prescribed. The current international consensus is for a threshold of € 750 million equivalent in local currency. This threshold in Indian currency would be equivalent to ` 5395 crores (at current rates). Therefore, CbC reporting for an international group having Indian parent, for the previous year 2016-17, shall apply only if the consolidated revenue of the international group in previous year 2015-16 exceeds ` 5395 crore (the equivalent would be determinable based on exchange rate as on the last day of previous year 2015-16).

(xv) Meaning of certain terms [Section 286(9)]:

	Term	Meaning
(1)	Accounting year	Case	Accounting year
		In a case where the parent entity or alternate reporting entity is resident in India; or	A previous year
		In any other case	An annual accounting period, with respect to which the parent entity of the international group prepares its financial statements under any law for the time being in force or the applicable accounting standards of the country or territory of which such entity is resident
(b)	Agreement	(i) an agreement referred to in section 90(1) or section 90A(1); or (ii) any agreement as may be notified by the Central Government in this behalf.
(c)	Alternate reporting entity	Any constituent entity of the international group that has been designated by such group, in the place of the parent entity, to furnish the CbC report in the country or territory in which the said constituent entity is resident on behalf of such group.
(d)	Constituent entity	(i) any separate entity of an international group that is included in the consolidated financial statement of the said group for financial reporting purposes, or may be so included for the said purpose, if the equity share of any entity of the international group were to be listed on a stock exchange;

		(ii) any such entity that is excluded from the consolidated financial statement of the international group solely on the basis of size or materiality; or (iii) any permanent establishment of any separate business entity of the international group included in clause (i) or clause (ii), if such business unit prepares a separate financial statement for such permanent establishment for financial reporting, regulatory, tax reporting or internal management control purposes
(e)	Group	This includes a parent entity and all the entities in respect of which, for the reason of ownership or control, a consolidated financial statement for financial reporting purposes,- (i) is required to be prepared under any law for the time being in force or the accounting standards of the country or territory of which the parent entity is resident; or (ii) would have been required to be prepared had the equity shares of any of the enterprises were listed on a stock exchange in the country or territory of which the parent entity is resident.
(f)	Consolidated financial statement	The financial statement of an international group in which the assets, liabilities, income, expenses and cash flows of the parent entity and the constituent entities are presented as those of a single economic entity
(g)	International group	Any group that includes,— (i) two or more enterprises which are resident of different countries or territories; or (ii) an enterprise, being a resident of one country or territory, which carries on any business through a permanent establishment in other countries or territories;
(h)	Parent entity	A constituent entity, of an international group holding, directly or indirectly, an interest in one or more of the other constituent entities of the international group, such that,- (i) it is required to prepare a consolidated financial statement under any law for the time being in force or the accounting standards of the country or territory of which the entity is resident; or (ii) it would have been required to prepare a consolidated financial statement had the equity shares of any of the enterprises were listed on a stock exchange, and, there is no other constituent entity of such group which, due to ownership of any interest, directly or indirectly, in the first mentioned constituent entity, is required to prepare a consolidated financial statement, under the circumstances referred to in clause (i) or clause (ii), that includes the separate financial statement of the first mentioned constituent entity.


(i)	Permanent establishment	Meaning assigned to it in clause (iiia) of section 92F i.e., includes a fixed place of business through which the business of the enterprise is wholly or partly carried on.
a)	Reporting accounting year	The accounting year in respect of which the financial and operational results are required to be reflected in the report to be furnished by the parent entity or the alternate reporting entity in respect of the international group of which it is a constituent, every year, on or before the due date specified under section 139(1).
(k)	Reporting entity	The constituent entity including the parent entity or the alternate reporting entity, that is required to furnish a report in respect of the international group of which it is a constituent, for every reporting accounting year on or before the due date mentioned under section 139(1).
(I)	Systemic failure	Systemic failure, with respect to a country or territory, means that the country or territory has an agreement with India providing for exchange of report of the nature referred to in section 286(2), but- (i) in violation of the said agreement, it has suspended automatic exchange; or (ii) has persistently failed to automatically provide to India the report in its possession in respect of any international group having a constituent entity resident in India

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