MNCs in India may find it difficult to dodge taxmen

Multinational companies (MNCs) in India which have been evading tax on profits created due to a function carried out in the country by shifting contractual risk to some other location may soon find it difficult to escape the domestic tax net.

Experts closely working with the government on how to go about implementing the Organisation of Economic Cooperation and Development’s (OECD) Base Erosion Profit Shifting (BEPS) project, say the government was looking at how quickly they can incorporate Action 13 of BEPS, which has something called the country-by-country (CBC) reporting, into India’s tax framework.

According to Anis Chakravarty, senior director, Deloitte India, CBC reporting could be introduced as soon as before the next Budget (February 28, 2016).

“Of the 15 actions (guidance prepared by the OECD for BEPS), the one which is most likely to go off the block first for implementation is Action 13, which is termed as country-by-country (CBC) reporting,” he told dna.

As part of G20, India is a signatory to the global tax initiative to restore fairness in the international tax system and align procedures across countries. The OECD has laid out 15 actions to address three major issues in a multi-jurisdiction tax regime – double taxation, double non-taxation and transparency.

The Action 13 mandates MNCs to maintain a CBC report that is similar to India’s Form 3CEB. Under the CBC reporting, every company is expected to maintain master file that is a repository of information expected to be prepared at the headquarters of the MNC.

Besides that, it would also be expected to prepare a local file. This would be prepared and maintained at every subsidiary country level.

The CBC report would be expected to be submitted by MNCs to the tax authorities to be reviewed every year. Any discrepancy or gap detected in it would result in initiation of audit by concerned agencies.

Chakravarty says the CBC reporting rule would make MNC audits by local tax administration easier.

“India currently does not have this (CBC kind of reporting norm) because it follows a different set of transparent documentation rules for Indian purposes,” he said.

According to him, incorporation of CBC provision into local tax rules may tweak the documentation rules for MNCs for tax filing purposes.

Ravi Mahajan tax partner & national leader, business tax services, EY said once the CBC reporting becomes effective it would make it mandatory for MNCs to give details of transactions in all countries instead of just the transactions involving the entity in India.

“Today, what we have is more transaction-by-transaction reporting and not country-by-country reporting,” he said.

Sanjay Tolia, executive director of PwC, said CBC reporting would make it difficult for a MNC in India to transfer the contractual risk to some other location.

“It (CBC) will send a message to the MNCs to ensure that their tax documentations in India are aligned with their business (subsidiaries and headquarters in other countries) around the world,” he said.

Rahu Garg, associate director – direct tax, PwC India, said even if the CBC reporting is taken up by the government immediately, the industry would be given enough time to prepare itself for it to begin reporting information required under it.

On CBC, India has gone on record saying that it will implement it. If at all it digresses a bit, it would be on the aspect of deciding implementation threshold.

That is, what would be the size of a company, in terms of revenues, that would bring it under CBC reporting norm. As per BEPS’ guidance, only companies with revenues over Euro 750 million will be covered under CBC.

Tolia said he does not expect India to change the turnover threshold for CBC reporting.

“I don’t think we (India) will make this (revenue threshold) change because if it is lowered (like in China), it will bring more firms under CBC rule and India does not have the administrative strength to handle that kind of volume,” he said.

Most European Union (EU) countries do not have internal tax framework and follow OECD’s guidance on BEPS as their tax law. However, countries such as India, China, Australia and others, which have their own tax laws and rules, have to bring them in line with BEPS.

Australia recently took a step in this direction by coming out with its multinational anti-avoidance law (MAL) and China released draft Circular 2, which includes all 15 actions, with some minor changes, into its tax framework.