Opinion

The end of shifty accounting practices?

Rahul Mitra | Updated on January 19, 2018 Published on February 05, 2016

Stashed away And caught for it ELNUR/SHUTTERSTOCK.COM

India may introduce BEPS norms this Budget to address issues pertaining to transfer pricing and tax havens

The BEPS (Base Erosion and Profit Shifting) action plans have been rolled out as part of the joint initiative of the OECD and G-20 countries. India, being one of the major players in the G-20 league, would be looking to incorporate most of the BEPS action plans, to protect its tax base. This would have to be done with a bit of caution, so as not to unduly hurt the momentum of FDI investment, and the ‘Make in India’ initiative.

The BEPS action plans can be broadly classified into three categories: (a) requiring amendment of international tax treaties; (b) requiring amendments of domestic tax laws of a country; and (c) for which best-practice guidelines are prescribed, which need to be followed and practiced by taxpayers and revenue authorities.

Transfer pricing rules

BEPS predominantly impacts headquartered entities in a particular country. The tax administrator of such country would like to ensure that profits attributable to valuable intangibles and strategic functions, which are generally owned and performed by headquartered entities, are not parked in other jurisdictions, particularly tax havens, through creation of intermediary companies.

In the context of India, the focus of the revenue establishment would be more on large Indian outbound MNCs having a significant presence overseas. BEPS Action Plan 13 provides for robust documentation and disclosure mechanisms pertaining to transfer pricing (TP). Action Plan 13 has provided for a three-tier structure of TP documentation: (a) master file; (b) local documentation file; and (c) country by country (CbC) reporting.

The ‘master file’ is expected to provide an overview or blueprint of an MNC group’s global business model, covering organisational structure; description of the various businesses; intangibles used in the businesses; intercompany financial transactions; and financial and tax positions. The CbC reporting is required to be presented in a tabular format, setting out crisp information about the functions performed, assets owned, personnel employed, revenue generated, profits earned, taxes paid, capital structure, retained earnings, with respect to each entity of the MNC group located in different countries. CbC reporting would help highlight any possible mismatch between the level of profits or revenues residing in, or intangibles owned by, an entity of the MNC group; and the functions carried out by, or capital infused in, the said entity. This would raise an alarm for tax administrators to examine the structure in detail.

Budget provisions

India looks all set to incorporate the provisions of the master file and CbC reporting in its domestic tax laws in the Budget, with effect from the next fiscal year, as indicated by various senior revenue service officials in different public fora.

The other BEPS action plans relating to TP are more in the nature of laying down best practices; and do not require amendments in domestic tax laws. Another BEPS action plan pertains to controlled foreign company (CFC) rules, which are intended to ensure that the ultimate parent company does not park passive incomes in intermediate holding companies, hence deferring taxation at the level of the ultimate parent company. The Centre proposes to introduce CFC rules through incorporation in the draft guidelines on the new tax residency rules relating to place of effective management.

The use of bilateral tax treaties to avoid capital gains taxation and obtaining beneficial withholding tax rates through use of shell or conduit companies, is intended to be plugged under BEPS through specific anti- treaty-abuse rules.

One of the BEPS action plans provides for conceptualisation of a multilateral instrument, as a result of which the bilateral tax treaties executed between the signatories would be automatically amended, without requiring renegotiation of individual tax treaties. Such an instrument is expected to be finalised by the end of the calendar year 2016; and one understands that the Centre, amongst others, is keen to be a signatory to this.

The writer is leader of BEPS and Tax Dispute Resolution, KPMG in India. The views are personal

Published on February 05, 2016
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