Final Rules on Master File and CbCR in India – Signaling significant increase in Indian compliance obligations?

November 06,2017
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Rakesh Nangia (Managing Partner, Nangia & Co LLP)

Amit Agarwal (Partner, Nangia & Co LLP)

The BEPS project was conceived out of significant concerns surrounding multinationals abuse of mismatches between tax regimes across jurisdictions and the exploitation of the gaps in the tax treaty network. India has always supported BEPS since inception and has played a leading and intensive role in the formulation of its proposals, and is committed to implement the “minimum standards” of the Action Plan, including country-by-country (CbCR) reporting.

In keeping with India’s commitment to implement the recommendations of Action Plan 13 of Base Erosion and Profit Shifting (BEPS), the Finance Act, 2016 introduced Section 286 of Income-tax Act, 1961 (the Act) providing for furnishing of Country-by-Country Report (CbCR) in respect of an International Group. Section 92D of the Act which contained provisions for preparing TP documentation was also amended to provide for keeping and maintaining of Master File.

In continuation with the amendment, the Central Board of Direct Taxes (CBDT) on 6 October 2017, released the draft rules and forms in relation to manner of preparation and furnishing of Master File and CbCR. It is commendable, on part of CBDT, to consistently follow an inclusive approach and seeking public comments when introducing a new and important regulation. In the draft rules circulated on October 6, 2017 the CBDT had proposed insertion of New Rules 10DA and Rule 10DB of the Income-tax Rules, 1962 (the Rules), and the new Forms were prescribed i.e. Form Nos. 3CEBA to 3CEBE. The final rules in relation to CbCR guidelines have been notified on October 31, 2017.

While in principle there are no major differences in the draft rules and final rules, however a careful reading and comparison reveals certain key changes which have an impact on the nature and extent of disclosures required to be made. The notification of CbCR is likely to significantly increase the compliance burden for MNC subsidiaries and Indian MNC Groups and shall require them to re-strategize their transfer pricing policy in light of heightened disclosure norms laid down under the CbCR / Master File regime. This article discusses some of the key changes between the draft rules and the final notified rules and key implications of the final rules on Domestic and foreign MNCs operating in India.

Key changes incorporated in the Final Rules vis- -vis the Draft rules

- Provisions with respect to Master File

  • Threshold for applicability of Master File: Under the draft rules the threshold of INR 500 crores was with reference to the accounting year preceding such previous year. However, in the Final Rules the same has been altered to ‘accounting year’ under consideration. Further, the reference to ‘reporting year’ for the purpose computing the threshold in respect of the twin conditions related international transactions has been replaced with ‘accounting year’.

The reference to accounting year clarifies the applicability of the threshold to both inbound and outbound MNCs, and links the compliance to annual accounts prepared under law in force in the jurisdiction in which the parent entity operates.

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