s tax professionals head towards the end of the calendar year, keeping abreast of an ever changing dynamic of rules, regulations and reporting requirements continues to be a daunting challenge that promises to continue in 2018 and beyond. Between looming tax reform in the United States, rules impacting how the digital economy is taxed, and the continual roll-out of the OECD’s BEPS Action 13 reporting requirements (including the Local File, Master File and Country-by-Country, or “CbC” reports) in various countries, staying alert and tracking the impact of these regulatory and policy changes from both planning and compliance standpoints promises to continue to remain at the forefront for in-house tax professionals and advisors alike.
One such recent change to transfer pricing compliance requirements that brings a unique set of challenges relates to new rules surrounding transfer pricing documentation in India. On November 1, 2017, the Indian Ministry of Finance issued a press release on the Central Board of Direct Taxes (“CBDT”) which set forth the Ministry’s final rules with respect to transfer pricing reporting obligations, and most notably the introduction of the Local File, Master File and CbC components of the OECD’s BEPS Action 13 (Transfer Pricing Documentation and Country-by-Country Reporting). On the surface, the new Indian rules introduce reporting requirements that leverage heavily from the OECD’s previously issued guidance; however, the requirements (and most notably, the Master File) introduce unique elements that may cause taxpayers to amend and/or expand upon the content currently embedded in their Master File documents.
The new rules are applicable for fiscal years starting with years ending on or after March 31, 2017 (FY2016-17). Taxpayers will eventually be required to file their Master File and CbC reports by the annual tax return deadline (November 30) but for FY2016-17, the rules contain a one-time relief provision that allows taxpayers to submit these two components of their transfer pricing documentation package by March 31, 2018.
The new Master File requirements apply to Indian-based taxpayers who are members of an MNE that reports consolidated revenues at or above a threshold of INR 5 billion (USD 77 million), a threshold that is notably lower than the OECD’s Action 13 threshold of EUR 750 million (approximately USD 800 million). The consolidated group revenue threshold is only one component of the Master File reporting threshold analysis, as in addition to this requirement, the value of the subject international transaction(s) must exceed INR 500 million (or approximately USD 8 million). Further, for transactions involving intellectual property, the threshold is INR 100 million (or USD 1.5 million). All threshold measurements apply to the 2016-17 accounting year. The CbC reporting thresholds are generally in line with the OECD’s threshold measurements, as taxpayers are required to submit CbC reports if they report consolidated group revenues of or above INR 55 billion (USD 846 million) as measured for the twelve month accounting period ending on March 31, 2016.
The Master File requirements set forth in the new Indian regulations are generally in line with those set forth under Action 13, with some notable exceptions. Under the new regulations, the Master File requires the filing of a specific form (Form no. 3CEAA for “single constituent entities” and Form 3CEAB for multiple constituent group entities). In addition, taxpayers who meet the prescribed thresholds must be aware of the additional requirements set forth under the Indian regulations and which are not explicitly required under the OECD Action 13 requirements. While a high degree of overlap does exist between the Indian Master File rules and the content prescribed under OECD Action 13, the most pronounced difference between these two sources pertains to the preparation of detailed functional, asset and risk (“FAR”) analyses of any constituent group entity (whether based in India or elsewhere within the consolidated group) that contributes at least 10 percent of the revenues, assets or profits of the consolidated group. While the OECD Action 13 Master File requirements do require that taxpayers include in their Master File documents discussions of key value drivers and the overall supply/value chain for products, the requirement of including specific FAR details for entities based on a numerical threshold will undoubtedly create additional work for taxpayers and expand the level of investment required to prepare a version of the Master File that meets the requirements set forth in the Indian regulations. In addition, given the unique nature of the Indian rules, taxpayers will need to decide how best to adapt to the additional changes given that many taxpayers have already completed their global Master Files under the BEPS Action 13 model. Whether such changes are incorporated by maintaining a “dual” Master File structure (with one Master File prepared in accordance with the guidance under BEPS Action 13 and a second, parallel file with additional content as required under the Indian rules), an addendum/appendix covering the additional requirements, or a single Master File that incorporates the FAR requirements and can be shared with various taxing authorities, taxpayers will need to swiftly adopt to these new rules should they meet the reporting thresholds under the Indian rules in order to finalize and submit their documents by March 31, 2018.