What is transfer pricing?
A separate code on transfer pricing as mentioned under the Income tax Act (Section 91 to 92F) which covers intra cross border transactions under the group and specified domestic transactions. Thus with the introduction of Transfer pricing has become the most important international tax issue which are affections transactions of multinational companies operating in India.
Country wise Reporting
- The transfer pricing documentation and country wise reporting provides a template to the multinational companies to report annually for each tax jurisdiction in which they do business. This report is called as Country by Country Report (CBC Report)
- The CBC Reporting standard provides the multinational companies an Reporting implementation package which consist model legislation which can be used by countries which mandates the parent entity of the multinational company to file the CBC report which contains their global allocation of profit, taxes paid, and certain activity of economic indicators in its jurisdiction in which they operate and three model competent authority
Practical Steps for Country to Country Reporting
Action 13 of OCED lays the guidance note on implementing TransferPricing Documentation and country by country reporting
- Timing : Requirement for CBC Reporting
- The Multinational entities are required to file the CBC report for the fiscal year of 12 months starting from January 1.
- The key element of the statutory requirement requires the ultimate parent entity of the MNE group to file the CBC report on timely basis
- The MNE fiscal year relates to the consolidated reporting period for financial statement purposes and not to taxable years or to the financial reporting periods of
Which MNE's are required to file CBC Report
All MNE's group are required to file the CBC Report Except the following
There is a general exemption to certain MNE's group with annual consolidated revenue of group in the immediately preceding fiscal year is less than 750 million € or equivalent to amount in domestic currency.
Necessary conditions for obtaining and using CBC Report
Countries participating in OECD/G20 BEPS project are required to agree to the following conditions for obtaining and using the CBC Report:
Jurisdictions should maintain and enforce legal protections against the reported information. Such precautions will enable to preserve the confidentiality of the CBC report which is equivalent to the protection that would apply such information is delivered to the country under the provisions of Multilateral Convention on Mutual Administrative Assistance in Tax Matters, a TIEA or a tax treaty that meets the internationally agreed standard of information upon request as reviewed by the Global Forum onTransparency and Exchange of Information for Tax Purposes CBC Report Template as it enables the jurisdiction to assess the high level transfer pricing risk and also assessing other BEPS related risk.
Jurisdictions should use the standard template as contained in Annex III of Chapter V of the Transfer Pricing guidelines which enables the jurisdiction not to ask for either additional information nor it will fail to obtain the information which is required as per Annex III
Jurisdiction should properly use the information received from the MNE's in the CBC report template which will enable to asses high level transfer pricing issue and also assess the BEPS related risks.
End to End transfer Pricing
As transfer pricing compliance is basically a matter of senior tax professionals, the responsibility of executing the inter company transactions are spread across a broad chain of internal functions and distant offices.
A procedure of transfer pricing execution involves multiple hands on taxation, divisional controller, shared common services, information technology etc.
In absence of the unified oversight unsound conditions can develop at every transaction point such as ambiguity of responsibility, manual or informal practices, accounting policies, data mismatch, inefficient way for reconciliation etc. These conditions expose the MNE’s to significant risk , increase in compliance requirement, inefficiencies which may lead to frustration and breakdown of the execution chain
End to End Process for Executing Transfer Pricing
As the end to end process of transfer pricing is a lengthy process as it involves lot of time to examine the multiple internal functions, addressing your procedure, personnel and technology the benefits of which are as follows
- Timely and efficiently meeting the statutory requirements
- Minimizing the audit risk
- Maintaining Internal policy of the company on the better way
- Standardized data process and transfer pricing calculation criteria
- Rational Information Technology procedure and system
- Reducing indirect compliance cost
The financial services are facing far more challenges in operating due to the global financial changes, crises, fiscal pressures from government from all over the world, also the changing national and international regulations and necessity of the capital requirements.
As it is clearly visible from the scrutiny as carried out by the taxation authorities of the transfer pricing transactions, it is very evident that financial services is actually complex sector which involves globally widespread changes to interest tax deduction legislation, new regulatory and legislative developments.
Global Coordinated Documentation
- The New Transfer Pricing Documentation and reporting requirements by the OCED will significantly increase the compliance burden to the MNE’s over the next coming years.
- As the transfer pricing is no longer a compliance exercise but it involves strategic tax risk management compliance.
- The Group MNE’s will be required to file four tier documentation:
- Master File
- Local File
- Country by Country report
- Local Information returns
- As the tax authorities are adopting the OCED approach which will be critical process to ensure that the data presented consistently to tax authorities are harmonized and integrated.
- Thus the Global documentation will tend to increase burdensome procedure globally which will put pressure on the multinationals to maintain effective and consistent transfer pricing documentation.