Indian Master File & CbCR Rules – Open issues that CBDT needs to plug

January 10,2018
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Rahul Mitra (Partner National Head, Transfer Pricing & BEPS, KPMG India)

The Central Board of Direct Taxes (CBDT) had released the final rules relating to Master File and Country by Country (CbC) reporting about a couple of months back, extending the statutory date of compliance for the said items relating to fiscal year 2016-17 to 31st March, 2018. With less than three months remaining from the due date of compliance, there still remain several open areas or issues, on which clarity is required from the CBDT, either in the form of a clarificatory circular or answers to frequently asked questions (FAQs).

Some of the open issues relate to the general applicability of CbC reporting; and otherwise have their answers in the guidelines issued by the OECD relating to BEPS Action 13. Since the Indian regulations on CbC reporting are pari materia with the overall texture of CbC reporting, as prescribed by the OECD in BEPS Action 13, any open issue relating to CbC reporting, which is not addressed by the Indian regulations, namely the IT Act and IT Rules, but finds its answer in the guidelines issued by the OECD on BEPS Action 13, may be dealt with by resorting to the latter, as the Indian Revenue should not ideally deviate from the guidelines of OECD relating to BEPS Action 13, vis-a-vis the manner of presentation of data for the purposes of CbC reporting. Some of the other open issues/ ambiguities are specific to the Indian regulations relating to Master File, for which, ideally there needs to be further clarity from the CBDT. A brief discussion is made in this regard.

Open issues relating to general applicability of CbC reporting

  1. Connotation of “related party revenues” for the purposes of CbC reporting -
    • Note 2 to Part A of Form No. 3CEAD (i.e. CbC reporting format), which is a replica of the notes to the CbC reporting form contained in BEPS Action 13, clarifies “related party revenues” to mean revenues generated through dealings with associated enterprises (AEs).

    • Now, the term, AE, as defined in in the IT Act, is very wide in meaning; and interaliacarries common shareholding threshold > 26%, apart from other criteria for relationship or association. Obviously, the term “AE”, as per the definition of the IT Act, connotes a much wider meaning than the term “constituent entity”, which refers to entities, whose financial results are to be considered for the purposes of line by line consolidation while preparing accounts of the ultimate parent entity of the MNC group.

    • The OECD, in its documents, styled as “Guidance on the implementation of CbC reporting”, the last of which was updated in the month of November, 2017, has clarified the term “AE”, used for the relevant purpose in the form for CbC reporting, to mean “constituent entity”.

    • Thus, ideally, in absence of any provision to the contrary contained in the Indian regulations relating to CbC reporting, taxpayers should be well within their rights to interpret the term “AE”, for the purposes of disclosing “related party revenues” in the CbC reporting, to mean constituent entities.
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