On October 31, 2017, India introduced final rules that will significantly change the country’s transfer pricing documentation standards. The new rules will increase Indian taxpayers’ documentation obligations by requiring nonexempt taxpayers to prepare master file and country-by-country (CbC) reports, in addition to existing local-level documentation requirements.
The revised standards are largely consistent with the final recommendations of Action 13 of the Organisation for Economic Co-operation and Development’s Base Erosion and Profit Shifting (BEPS) project, to which India was a contributing party. Action 13 specifically addressed transfer pricing documentation and recommended a standardized documentation format in the form of a three-tiered structure: master file report, local country report and the CbC report. With some minor exceptions, the contents of the master file and CbC reports for Indian purposes are largely consistent with those offered in Action 13. Under the new Indian rules, the first compliance year for master file and CbC reports will be the financial year (FY) 2016–17, with an initial due date of March 31, 2018. In subsequent years, the documents will be due on or before the local tax return filing date. The master file and CbC reports will need to be electronically filed in accordance with these dates.
Per BEPS Action 13, the master file is a comprehensive document providing a high-level overview of the Multinational Enterprise (MNE) group’s business and industry, its legal entity structure, transfer pricing positions, financial information, discussion of its intangible property and functional and risk analysis. The master file is intended to offer tax authorities a summary of the MNE group’s transfer pricing arrangements and supply chain in their entirety, rather than just a focus on transactions involving the local country, which historically has been the focus of documentation prepared by MNEs. In India, the master file is required of constituent entities of “international groups,” i.e., MNEs, if two conditions are met. The first condition is that the consolidated revenue for the international group exceeds INR5 billion (approximately US$78 million). The second condition consists of intercompany transaction volume thresholds; a master file is required if the aggregate value of intercompany transactions involving the Indian taxpayer exceed INR500 million (approximately US$7.8 million) or intangible property-related transactions involving the taxpayer exceed INR100 million (approximately US$1.5 million). The contents of the master file required by India are largely consistent with those identified in Action 13; however, the Indian requirements do require more detailed descriptions for corresponding sections and full disclosure of the names and addresses of all entities in the international group and the international group’s top 10 third-party lenders. In addition, the functional analysis should cover all constituent entities that account for 10 percent (or more) of the assets, revenues or profits of the international group. All taxpayers are required to file the first part, i.e., Part A, of the statutory Form No. 3CEAA—referred to as the master file form. Part A contains general information for the international group and is required to be filed even if the Indian constituent entity isn’t required to prepare a master file. If the Indian constituent entity exceeds the thresholds for the master file, it would need to submit Part B of Form No. 3CEAA, which includes the master file’s contents.
According to BEPS Action 13, the CbC reporting template is meant to provide MNE group information that tax authorities may use to perform high-level transfer pricing risk assessments. The CbC report specifies revenues (split between related and third party), profits, taxes paid, stated capital, tangible assets and number of employees for each legal entity or permanent establishment within the group. It also requires disclosure of each legal entity’s main business activity. Per BEPS Action 13, companies with consolidated revenues of €750 million or greater would need to prepare and file the CbC report for accounting years beginning on or after January 1, 2016. The Indian rules for CbC reporting are consistent with the Action 13 recommendations. In India, international groups are subject to CbC reporting requirements if consolidated group revenues for the preceding accounting year exceed INR55 billion (approximately US $859.1 million or €723.8 million). The Indian CbC reporting requirements would apply in two cases:
- The parent company of the international group resides in India
- The parent company of the Indian constituent entity resides in a country that does not have a mechanism, e.g., a treaty or agreement, for the exchange of CbC reports with India (or a country that has a mechanism for exchange but is unwilling to provide such information)
In the latter case, the parent company may designate a surrogate reporting entity that will file the CbC in a jurisdiction with an exchange mechanism with India; otherwise, the Indian constituent entity would be required to file the CbC report in India. In cases where the parent company isn’t an Indian resident, the Indian constituent must submit Form 3CEAC identifying the CbC reporting entity and its country of residency. For the first compliance year, Form 3CEAC is due on or before January 31, 2018. In subsequent years, the notification will be due at least two months prior to the tax return due date. If the CbC reporting entity resides in India, the Indian entity is required to submit the CbC report in Form 3CEAD. The deadline for submission is March 31, 2018, for the initial compliance year and the due date for the tax return in subsequent years.
While the BEPS project was coordinated in determining its recommendations, implementation at the local level has varied significantly in terms of timing and degree. For U.S.-based MNEs, a strict adherence to transfer pricing requirements in the U.S. could result in noncompliance in other jurisdictions, including India. While India has fully adopted Action 13’s recommendations, the U.S. has only adopted the CbC reporting requirement, without adopting the master file and local country file requirement. The initial compliance year for U.S. CbC reporting includes accounting periods beginning on or after June 30, 2016, which is effectively a year after the initial compliance year in India. To avoid noncompliance, U.S.-based MNEs should carefully consider the transfer pricing documentation requirements and deadlines in the non-U.S. jurisdictions where they operate. In the case of U.S.-based MNEs with Indian affiliates, a change in documentation format and preparation and submission of a CbC report may be required in coming months to meet Indian requirements.