With globalisation, it has become a universal phenomenon for Multinational Organisations to have branches, subsidiaries or divisions in more than one country. This exposes the group to different tax regimes in different tax jurisdictions. Thus, managing the taxes and complying with regulations becomes a challenging task, except some organisations use this as an opportunity to exploit the gaps and mismatches in the tax regimes. Enterprises make profits in one jurisdiction, however, shift them across borders to report income in a country where the taxes are lower or not applicable at all. This results in erosion of the tax base of countries where these profits are made and the exploitation has only grown exponentially, over the past few decades. The Organisation of Economic Cooperation and Development (OECD), an inter-governmental organisation of 37 member countries, came up with 15 action points and minimum standards to curb such practices, under its Base Erosion and Tax Shifting Project (BEPS) which is being implemented by the G20 Nations. A majority of transfer pricing documentation and reporting requirements have emerged from the same and India is one of the first few countries to implement these guidelines.
In the previous article, we discussed the documentation required to be maintained by an enterprise involved in international transactions, as per the transfer pricing regulations in India. The reporting requirements for transfer pricing include reporting of this same information in certain specific forms prescribed by the tax authorities. Besides, a report on arm’s length pricing of the international transactions is also required to be furnished,as certified by a Chartered Accountant. These reports are applicable according to the threshold prescribed and have to be furnished by the due date prescribed. Thereby, there are three main components oftransfer pricing reporting requirements in India:
- Filing of information as per Master File
- Filing of Country by Country Report
- Furnishing a report by an Accountant
For the purpose of our discussion ahead, in simple terms,
- Permanent establishment meansa fixed place of business which generates income on behalf of another enterprise
- International Group means a group of enterprises that includes at least one entity with tax residency of a country different from the others. Further, if any permanent establishment is located in another tax jurisdiction, the group of which the permanent establishment is a part would also be considered as an international group
- Constituent Entity means a separate business unit of a multinational group included in the consolidated financial reporting. If any entity is excluded merely based on materiality, such entity would also be considered as a constituent entity. It also includes a permanent establishment, if separate income statement is prepared for the same whether for internal reporting or external reporting.
- Alternate Reporting Entity means an entity which has been designated by an international group to furnish reports on behalf of the group, instead of the parent enterprise.
- Accounting Year is the period for which the parent entity prepares its financial statements under any law or applicable accounting standards in the country where it is resident.
Filing of Information from Master File
As per Rule 10DA read with section 92D of the Income Tax Act, 1961, a constituent entity has to submit Form 3CEAA (consisting of Part A and Part B) and Form 3CEAB with information which is usually maintained in the master file.
- Part A of Form 3CEAA is mandatory to all entities.
- Part B of Form 3CEAA is applicable if,
- the consolidated revenue of the international group for the accounting year exceeds INR 50 millionand
- the aggregate value of all international transactions exceeds INR 5 million OR the value of international transactions relating to intangible property exceeds INR 1 million
- Form 3CEAB is an intimation to notify the tax authorities if there are more than one constituent entity in India and a consolidated Form 3CEAA will be submitted on behalf of all entities. This intimation has to be submitted only by the entity who would be filing the consolidated form.
Form 3CEAA is required to be submitted by the due date of filing the income tax return, which is usually November 30. Form 3CEAB has to be submitted at least 30 days beforethe due date of filing Form 3CEAA, thus, usually October 30. All currency conversions for the purpose of filing forms are to be made at the telegraphic transfer buying rate of such currency, as on the last day of the accounting year. The information in these forms has to be retained for a period of nine years after the end of the financial year to which it relates.
Filing of Country by Country Report
As per Rule 10DB read with section 286 of the Income Tax Act, 1961, a constituent entity has to submit Form 3CEAC, Form 3CEAD and Form 3CEAE with information which comprises the Country by Country Report (CbCR). All these forms are applicable only if the consolidated revenue of the group exceeds INR 550 million.
- Form 3CEAC is an intimation to be filed by the constituent entity to notify the tax authorities with details of parent entity or the alternate reporting entity who will file the CbCR and their tax residency.
- Form 3CEAD is the Country by Country Report to be submitted by the parent entities or the alternate reporting entities if they are resident in India and is not applicable otherwise. The form requires reporting of information such as aggregate revenue, profit, taxes paid, number of employees, tangible assets, etc with regards to each country or territory in which it has operations, the details of constituent entities, nature and business activities of such entities and other similar information. In case the parent entity or alternate reporting entity is not required to file the CbCR as per the tax laws applicable in the country where it is resident, the CbCR has to be submitted by the constituent entity.
- Form 3CEAE is an intimation to notify the details of ‘designated constituent entity’. This applies in cases where the liability to file the CbCRis on the constituent entity (where the parent entity is not required to file the CbCR in the country where it is tax resident), and there are more than one constituent entities in India. In such cases, anyone entity can file CbCR by pre-informing the tax authorities through this form.
The Form 3CEAD has to be submitted within twelve months from the end of the accounting year, while the intimation in Form 3CEAC has to be submitted two months before the same. There is no due date specified for filing Form 3CEAE. For example, if accounting year of a parent entity ends on December 31, the constituent entity has to file Form 3CEAC by October 31 next year and the parent entity (if resident in India) or the constituent entity whoever is liable to file CbCR, has to submit the Form 3CEAD by December 31 next year.
Furnishinga Report from Chartered Accountant
Form 3CEAA and Form 3CEAD require reporting detailed information with regards to the international group, its constituents, and the financial information of the entire group presented country-wise. However, these forms do not cover the information with regards to the calculation of Arm’s Length Price. This is covered by the Form 3CEB which is to be certified by a Chartered Accountant. The report requires the chartered accountant to give a true and fair opinion on the appropriateness of the documents maintained and other information,as prescribed by the law, and to also certify and report the correctness of the extensive list of transactions, including the methodology used.This report is mandatorily applicable to all entities who have entered into International Transactions with associated enterprises, irrespective of the value of such transactions.Thus, the report is applicable even if only a single transaction has occurred during the year.To obtain this report from a Chartered Accountant, the enterprise will have to provide access to all records and details in relation to transfer pricing and international transactions. This report has to be furnished by the due date of filing income tax returns which is usually November 30.
Penalty for Non-Compliance
Transfer Pricing is a critical area, ensues heavy penalties for non-compliance. Therefore, proper documentation and regular compliance can save enterprises from additional tax burden and related hassles. The penalties prescribed under the income tax act are as follows:
- Failure to maintain documents or information as prescribed by the law – penalty up to 2% of the value of such transactions entered into by the enterprise where appropriate documentation is not available
- Under-reporting of income without documents to substantiate – penalty up to 50% of the tax payable on such under-reported income, in addition to the tax payable
- Under-reporting of income by wilful misrepresentation or failure to report transactions – penalty up to 200% of the tax payable on such under-reported income, in addition to the tax payable
- Failure to furnish Accountant’s Report – penalty up to INR 100 thousand
- Failure to furnish documentation to the tax officer– penalty up to 2% of the value of such transactions entered into by the enterprise for which documentation is not furnished.