201901.06
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MULTINATIONALS TO FILE COUNTRY-BY-COUNTRY REPORT LOCALLY

COMPULSION FOR MULTINATIONAL ENTERPRISES IN INDIA
1.INTRODUCTION OF BASE EROSION AND PROFIT SHIFTING (BEPS) IN INDIA
INDIA – The Indian Government vide Notification No. 88/2018 dated 18.12.2018 has finally implemented Country-by-Country Reporting (CbCR) filing requirements in terms of OECD guidelines.
It shall be applicable for Indian constituent entities of large multinationals parented in some foreign countries, including United States, Saudi Arabia, United Arab Emirates, Sri Lanka and Taiwan.
COUNTRIES – US is one of the prominent countries along with UAE, Saudi Arabia, Taiwan and Sri Lanka that has not entered in an agreement for the exchange of information with India.
The Amendment as made by the Indian Government will majorly impact constituent entities of US Multinational Enterprises (MNEs) for the reason being the enormous presence of US-based companies in India. In India, US is one of the largest contributories to Foreign Direct Investment in India.
OECD – The Base Erosion and Profit Shifting (BEPS) Action Plan adopted by the Organization for Economic Co-operation and Development (OECD) and G20 Countries in 2013 emphasied for enhancing transparency for tax administrations.
During such an adaption, it evolved that there was a dire need for sharing adequate information to assess high – level transfer pricing and other BEPS – related risks for tackling the related problems.
2.COUNTRY-BY-COUNTRY REPORTING
The Indian Government under the aforesaid notification read with Finance Act, 2016 has implemented filing of CbCR.
AMENDMENT
The sub-rule (4) of Rule 10DB in Part-II of the Income Tax Rules, 1962 stands substituted as below:
The period of furnishing of the report under sub-section (4) of section 286 by the constituent entity referred to in that sub-section shall be twelve months from the end of the reporting accounting year.
 Provided that in case the parent entity of the constituent entity is resident of a country or territory, where, there has been a systemic failure of the country or territory and the said failure has been intimated to such constituent entity, the period for submission of the report shall be six months from the end of the month in which said systemic failure has been intimated.”
REQUIREMENT
“The CbCR legislation requires India Constituent Entities of multinationals to file a CbC Report in India if the MNE has consolidated revenue exceeding Rupees 5500 Crores in the immediately preceding accounting year.”
It is pertinent to note that the requirement to file CbCR locally could also arise where the threshold for filing the CbCR is met locally in India but not met globally.
However, there are situations wherein the India Constituent Entities are required to locally file the CbCR. They are as follows:
1.Where the Parent Entity of India constituent entity is ‘not obligated’ to file a CbC Report in the country in which the Ultimate Parent Entity or alternate reporting entity of the MNE is resident;
2.Where India does not have an agreement for the exchange of the CbC Report by the country in which the Ultimate Parent Entity is resident; or
3.Where there has been a systemic failure of the country to exchange CbC Report with a country in which the ultimate parent entity of the MNE is resident and the failure is intimated by the prescribed authority to the India constituent entity of the MNE.
EXCEPTION
There are certain exceptions for filing in CbCR as below:
1.where the MNE is headquartered in a country with which India has an agreement for exchange of information, the India Constituent Entity must only file a notification on Form 3CEAC specifying the details of the group entity Country-by-Country reporting. In the above situation, there exists no requirement of filing CbC Report locally by the India Constituent Entity.
2.where MNE has been nominated a group entity in other tax jurisdiction with which India had entered into an information exchange agreement as it alternative reporting entity to file the CbCR.
DURATION
MNEs now require to file the CbCR locally in India by 12 months from the end of the reporting accounting year.
SYSTEMIC FAILURE IN REPORTING
The amendment specified by Notification No. 88/2018 also specifies that if the parent entity of India Constituent Entity is a resident of a country where there has been a systemic failure by the country and the failure has been intimated to such Constituent Entity, the due date for submission of CbCR shall be 6 months from the end of the month in which systemic failure has been intimated to the inbound Constituent Entity. 
3.WHAT IS COUNTRY-BY-COUNTRY REPORT?
The BEPS Action Plan 13 Report which deals with Transfer Pricing Documentation and Country-by-Country-Reporting provides a template for Multinational Enterprises (MNEs) to report annually the information and for each jurisdiction in which they do business. This report is called the Country-by-Country Report(CbCR).
To facilitate the implementation of the CbCR standard, the BEPS Action 13 report consists of a CbCR Implementation Package as below:
1.Model Legislation which could be used by countries to require the ultimate parent entity of an MNE Group to file the CbCR in its jurisdiction of residence including backup filing requirements and
2.Three Model Competent Authority Agreements that could be used to facilitate implementation of the exchange of CbCR.
4.DEFINITIONS
In order to understand the actual effect and implications of the amendment made by the Indian Government in line with OECD recommendations, let us delve into a few basic terminologies.
MNE GROUP:
The term “MNE Group” has been defined under Article 1.2 of Model Legislation Related to Country-by-Country Reporting. It means any Group that
a.includes two or more enterprises the tax residence for which is in different jurisdictions, or includes an enterprise that is resident for tax purposes in one jurisdiction and is subject to tax with respect to the business carried out through a permanent establishment in another jurisdiction, and
b.is not an Excluded MNE Group.
CONSTITUENT ENTITY:
The term “Constituent Entity” has been defined under Article 1.4 of Model Legislation Related to Country-by-Country Reporting. It means
a.any separate business unit of an MNE Group that is included in the Consolidated Financial Statements of the MNE Group for financial reporting purposes, or would be so included if equity interests in such business unit of an MNE Group were traded on a public securities exchange;
b.any such business unit that is excluded from the MNE Group’s Consolidated Financial Statements solely on size or materiality grounds; and
c.any permanent establishment of any separate business unit of the MNE Group included in (i) or (ii) above provided the business unit prepares a separate financial statement for such permanent establishment for financial reporting, regulatory, tax reporting, or internal management control purposes.
 ULTIMATE PARENT ENTITY:
The term “Ultimate Parent Entity” has been defined under Article 1.6 of Model Legislation Related to Country-by-Country Reporting. It means a Constituent Entity of an MNE Group that meets the following criteria:
a.it owns directly or indirectly a sufficient interest in one or more other Constituent Entities of such MNE Group such that it is required to prepare Consolidated Financial Statements under accounting principles generally applied in its jurisdiction of tax residence, or would be so required if its equity interests were traded on a public securities exchange in its jurisdiction of tax residence; and
b.there is no other Constituent Entity of such MNE Group that owns directly or indirectly an interest described in sub-section (i) above in the first mentioned Constituent Entity.
 CONSOLIDATED FINANCIAL STATEMENTS:
The term “Consolidated Financial Statements” has been defined under Article 1.12 of Model Legislation Related to Country-by-Country Reporting. It means the financial statements of an MNE Group in which the assets, liabilities, income, expenses, cash flows of the Ultimate Parent Entity and the Constituent Entities are presented as those of a single economic entity.
5.CONCLUSION
While analyzing the implication and effect of amendment it is observed that there is a thoughtful aspiration at the Government’s end to get its hands on comprehensive information about MNEs global and India operations.
CbCR is step towards achieving the international commitment of India and to prevent base profit erosion. This will further result into scrutiny of transfer pricing arrangements of MNES in India in line with the BEPS Action Plan via OECD.
We further anticipate that the Indian transfer pricing disputes will see a different zone altogether in the coming days.
The content is purely an academic analysis under “Legal intelligence Series”.
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