Country-by-country reporting implementation: not so simple after all!

The Base Erosion and Profit Shifting (BEPS) Action Plan adopted by the OECD and G20 countries in 2013 recognised that enhancing transparency for tax administrations by providing them with adequate information to assess high-level transfer pricing and other BEPS-related risks is a crucial aspect for tackling the BEPS problem. Against that background, the Report on Action 13, released in September 2014, provides a template for Multinational Enterprises (MNEs) to report for each tax jurisdiction in which they do business the information set out in the template This report, which needs to be filed annually, is called the Country-by-Country (CbC) Report. The CbC reporting template requires MNEs to report the amount of revenue (related and unrelated party), profits, income tax paid and taxes accrued, employees, stated capital and retained earnings, and tangible assets annually for each tax jurisdiction in which they do business. In addition, MNEs are also required to identify each entity within the group doing business in a particular tax jurisdiction and to provide an indication of the business activities each entity conducts. This information is to be made available to the tax authorities in all jurisdictions in which the MNE operates.

Following the adoption and publication of the September 2014 Report, further work was undertaken with a view to defining (i) the timing of preparation and filing of the CbC Report, (ii) the scope of MNEs subject to CbC Reporting, (iii) the conditions underpinning the obtaining and use of the CbC Report, and (iv) the framework for government-to-government mechanisms to exchange CbC Reports, including the preferred exchange instrument in order to ensure that the CbC Report of an MNE Group can be made available in a timely and efficient manner to the tax authorities of jurisdictions in which the MNE Group has business activities and the secondary mechanism for the filing of CbC Reports in case a jurisdiction fails to provide information to a jurisdiction meeting the conditions for receipt of such information. These aspects have been reflected in a guidance note on the implementation of transfer pricing documentation and CbC reporting in February 2015.

In accordance with the February 2015 guidance, the CbC Reporting Implementation Package consists of (i) model legislation which could be used by countries to require the ultimate parent entity of an MNE group to file the CbC Report in its jurisdiction of residence including backup filing requirements and (ii) three model Competent Authority Agreements that could be used to facilitate implementation of the exchange of CbC Reports, respectively based on the 1) Multilateral Convention on Administrative Assistance in Tax Matters, 2) bilateral tax conventions and 3) Tax Information Exchange Agreements (TIEAs). A tax administration is expected to preserve the confidentiality of the information contained in the reports. As a next step, it is intended that an XML Scheme and a related User Guide will be developed with a view to accommodating the electronic exchange of CbC Reports.

As a key stakeholder in the OECD/G20 BEPS Action Plan, the Indian tax administration is under an obligation to implement the OECD’s guidance on Action 13. On implementation of the guidance, for fiscal years beginning on or after 1 January 2016, every Indian resident and ultimate parent of a MNE group having a consolidated group turnover exceeding Euro 750 million (approximately INR 5,500 crores) would be required to file the CbC Report with the Indian tax administration. The CbC Report covers not just legal entities or subsidiaries of the MNE group; but also branches/ permanent establishments located in other countries through which it carries on business. The Report needs to be filed no later than 12 months from the end of the relevant fiscal year. Hence, for most Indian MNE groups the CbC report would apply from Financial Year 2016-17 onwards and the first CbC report would need to be filed by 31 March 2018. The Report would be shared by the Indian tax administration with other countries where the MNE operates on an automatic basis within the stipulated time frame under multilateral or bilateral conventions. Since the entire framework of CbC reporting is based on reciprocity, the foreign countries would also share with the Indian tax administration the reports filed by the ultimate MNE parent entities resident in their respective countries and having operations in India.

While CbC reporting is the primary responsibility of the ultimate parent of an MNE group, there are circumstances under which an entity that is resident in India; but not the ultimate parent could also be required to comply with CbC reporting in India. This secondary filing trigger could arise if the country where the ultimate parent is based does not implement CbC reporting requirements or if India does not have satisfactory mechanism for exchange of CbC reports with that country.

The CbC template introduced in the OECD guidance is an entirely new reporting requirement. India-based MNE groups will have to take the necessary steps to ensure their ability to produce the required information, including preparing protocols for gathering the information and developing internal processes and responsibilities with regard to the new reporting. In addition, MNE groups should monitor developments with respect to the adoption of such reporting requirements in the countries in which they operate.