Union Budget 2016 – Key Transfer Pricing proposals

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Customer Care No. 91-11-45562222
Union Budget 2016 Key Transfer Pricing proposals
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Customer Care No. 91-11-45562222

• The Hon'ble Finance Minister of India presented
  the third Budget of the Modi Government on 29
  February 2016. In the backdrop of significant
  global slowdown and a need to jumpstart the
  economy, the Finance Minister's job was to strike
  an intricate balance between growth, fiscal
  consolidation and the promise to provide ease of
  business coupled with a non-adversarial tax
  regime.
• In the recent past, transfer pricing has been a
  much debated topic in corporate board rooms as
  well as Government ministries worldwide. The OECD
  alongwith the G20 and certain other countries
  have issued the Base Erosion and Profit Shifting
  (BEPS) Guideline in October 2015 emphasizing on
  the need to focus on conduct and substance rather
  than contract and legal form in tax
  determination. Pricing of intra-group
  transactions is also a potential trigger for BEPS
  and expectedly found a crucial place in the OECD
  BEPS Guidelines.
• One of the key measures under the BEPS Guidelines
  in the course of determining the conduct and
  substance is the documentation requirement for
  intra-group transactions. The documentation
  should not only evidence the Functions carried
  out by the transacting entities, Assets employed
  and the Risks undertaken but also should provide
  a bird's eye view of the entire supply chain of
  the group worldwide. Specific requirement
  relating to furnishing and maintaining of a
  Master File and Country-by-Country (Cubic) Report
  by the Group's Ultimate Parent has been provided
  in the BEPS Guidelines to the above effect.

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Expectations from Budget 2016-17

• A Master File provides a broad overview of the
  entire group's functioning, including the
  business, details relating to intangibles and the
  group's operating structure. A Cubic report is a
  document capturing a snapshot of the financial
  position and certain other relevant
  characteristics for various group entities at
  each country level. This would provide tax
  authorities a holistic perspective of the group's
  activities and profitability at each country
  level.
• As mentioned above, India was a part of the OECD
  BEPS discussion and is a signatory to the BEPS
  report. In various interactions with the
  Government officials in the recent past, the
  Government reiterated its commitment to adopt the
  aforesaid BEPS Guidelines in the Indian domestic
  legislation including the TP documentation
  requirement.
• Given above, the Finance Minister announced the
  introduction of the aforesaid documentation
  guidelines within the Indian domestic tax
  legislation as a part of the Budget 2016. The
  Finance Act introduces detailed provisions
  relating to maintaining and furnishing of the
  Master File and the Cubic report. The ensuing
  paragraphs discuss the aforesaid amendment in
  detail.
• A. OECD BEPS Recommendation on Action Plan 13
•    In line with the recommendations contained in
  the OECD report on Action 13 of the BEPS Action
  Plan, the three-tiered transfer pricing
  documentation structure consisting of following
  is proposed to be adopted
•   -  a master file containing standardized
  information relevant for all multinational
  enterprises (MNE) group members
•   -  a local file referring specifically to
  material transactions of the local taxpayer and
•   -  a Cubic report containing certain
  information relating to the global allocation of
  the MNE's income and taxes paid together with
  certain indicators of the location of economic
  activity within the MNE group.

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While the Finance Bill has outlined reporting
requirements for Cubic report, the detailed rules
for master file and local file would be
prescribed in due course. B. Country-by-Country
(Cubic) report (proposed Section 286)     The
Cubic report has to be submitted by parent entity
of an international group to the prescribed
authority in its country of residence. While the
format of the Cubic report is to be prescribed,
the broad level content has been provided in the
new provision and is reproduced below (proposed
section 286(3)) "(3)For the purposes of
sub-section(2), there port in respect of an
international group shall include, (a) the
aggregate information in respect of the amount of
revenue, profit or loss before income-tax, amount
of income-tax paid, amount of income-tax accrued,
stated capital, accumulated earnings, number of
employees and tangible assets not being cash or
cash equivalents, with regard to each country or
territory in which the group operates (b) the
details of each constituent entity of the group
including the country or territory in which such
constituent entity is incorporated or organised
or established and the country or territory where
it is resident (c) the nature and details of the
main business activity or activities of each
constituent entity and (d) any other information
as may be prescribed."
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• The above seems to be broadly in line with the
  Cubic content provided by the OECD BEPS report,
  captured hereunder
• The Cubic reporting is required for an
  international group having an Indian parent, for
  the previous year 2016-17, to apply only if the
  consolidated revenue of the international group
  in previous year 2015-16 exceeds the prescribed
  threshold(as per the Memorandum to the Finance
  Bill 2016, the threshold is indicated to be INR
  5395 crore (Euro 750 million)).
• If applicable, then the Indian parent entity
  will be required to furnish the Cubic report in
  respect of the group on or before the due date of
  furnishing of return of income for the relevant
  Financial Year
• An Indian entity, having a parent entity
  resident outside India, will be required to
  provide information regarding the country or
  territory of residence of the parent entity to
  the prescribed authority on or before the
  prescribed date.
• An entity in India belonging to an
  international group is required to furnish Cubic
  report to the prescribed authority if the parent
  entity of the group is resident
• - in a country with which India does not have
  an arrangement for exchange of the Cubic report
  or
• - such country is not exchanging information
  with India even though there is an agreement and
• - this fact has been intimated to the entity
  by the prescribed authority

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•   For non-furnishing of the Cubic report by an
  entity which is obligated to furnish it, a graded
  penalty structure would apply which include Rs.
  5,000 per day (if default does not exceed one
  month) and Rs. 15,000 per day (for the period
  exceeding one month)
•    Further, for any default that continues even
  after service of order levying penalty, as above,
  then the penalty for any continuing default will
  be Rs 50,000/- per day
•    In case of non-submission of information
  called by prescribed authority in relation to
  Cubic report in a timely manner, a penalty of Rs.
  5,000/- per day applies. Similar to the above, if
  default continues even after service of penalty
  order, then penalty of Rs.50,000/- per day
  applies for default beyond date of service of
  penalty order
•    If the entity has provided any inaccurate
  information in the Cubic report, penalty of Rs
  500,000/- applies subject to certain conditions
• C. Master File (proposed Section 92D(4))
•    The information and document in relation to
  master file will be furnished to the prescribed
  authority within such period as may be prescribed
  and the manner of furnishing may also be provided
  in the rules
•    However, as appearing in the Memorandum to
  the Finance Bill 2016, it seems that the content
  of the Master File would be in line with the OECD
  BEPS report and may contain the overview of the
  MNE group's business, including the nature of its
  global business operations, its overall transfer
  pricing policies, and its global allocation of
  income and economic activity.
•    Non-furnishing of the information and
  document to the prescribed authority, a penalty
  of Rs. 5 lakh shall be leviable. However,
  reasonable cause defense against levy of penalty
  shall be available to the entity.

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Customer Care No. 91-11-45562222
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