Master File & CbCR – An incisive analysis

November 16,2017
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Simachal Mohanty (Head, Global Taxation, Dr Reddy's Laboratories Ltd.)

Ministry of Finance has released the final rules on October 31,2017 on the rules in respect of Country-by-country reporting (‘CbCR’) and Master File (‘MF’) as required to be furnished to tax authorities in terms of Sec.286(8) and Sec 92(D) of Income Tax Act.

Following are the key aspects which require intricate consideration of a tax payer while preparing CbCR/Master File:

A. Transfer Pricing Policies of the Group

An international group is required to provide description of the transfer pricing policies regarding intangibles, R&D and financing arrangements.

Further, there are additional regulatory requirements in some countries. For example, in UK , a qualifying multinational is required to disclose information relating to their UK tax strategy online. The strategy include the company's or group's approach to risk management and governance arrangements in relation to UK taxation, level of risk that the company or group is prepared to accept in relation to UK taxation and the company's or group's approach to its dealings with UK tax authorities

For the groups which has UK operations and UK subsidiaries, an absolute coherence is required while providing the information in response to Master file and UK Tax strategy.

B. Threshold for CbCR and MF

While the Indian Rules have more or less maintained the threshold for CbCR filing requirements at the OECD’s recommendations, the threshold for MF is much lower and has twin conditions. For non-India MNC’s conversion of the transaction value and consolidated turnover by applying Indian conversion rates could be challenge, particularly for medium size MNC’s.

Further, the low threshold for MF significantly increases the compliance burden for medium size MNC’s having very few entities. For such MNC’s, it may make be easier than providing the financials of the Group entities than preparing the MF. Submission of MF would increase the scope and effectiveness of the transfer pricing scrutiny.

The requirement to file Part A of the MF form (Form 3CEAA) on all MNC’s (regardless of the threshold conditions) has to be kept in mind to mitigate any penalty.

C. Local File & Transfer pricing Documentation

Historically, in most of the countries, transfer pricing documentation depicted a one sided analysis of the comparability with independent unrelated comparables to arrive at the arm’s length conclusion. Normally, in most of the cases, the comparability happens with the domestic comprabales, treating the assessee entity as the tested party.

However, on a going forward basis, upon implementation of CbCR, this approach is likely to undergo change and the least complex entity would necessarily be designated as tested party and the complex entity would be entitled to the residual income. This would be possible as the tax authorities would have the information of all the Group entities from the CbCR. Even in cases, CbCR is not applicable, the Indian tax authorities in case of an audit obtain such information either by review of the MF or on specific request.


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  • Laughing gas on May 22,2018

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  • Ankit on Dec 20,2017

    Dear Sir, I have a query in relation to point H that you mentioned regarding notification of MLI by Indian Govt. Is the fact of entering into Multilateral exchange of agreement with countries, required to be separately notified by Indian Govt. in Official Gazette. In case it delays in notifying, Indian constituent entities of overseas group shall also be obliged to file a CbCR in India. I shall be grateful if you please confirm my understanding and also request you to provide the source of such information.