By Madhan N, PricewaterhouseCoopers Private Limited, India
The Indian government has prescribed country-by-country report filing requirements for Indian subsidiaries of large multinationals parented in some foreign countries, including the US, Saudi Arabia, United Arab Emirates, Sri Lanka, and Taiwan.
Notification No. 88/2018, issued on December 18, 2018, will mainly impact subsidiaries of US MNEs, given the large presence of US-based companies in India. The US is one of the largest sources of foreign direct investment in India.
This new Indian notification was followed up with by a technical update, issued on December 26, 2018.
India country-by-country reporting
The Indian government through Finance Act, 2016 implemented country-by-country reporting largely in line with OECD recommendations.
The country-by-country reporting legislation requires India constituent entities of multinationals to file a country-by-country report in India if the MNE has consolidated revenue exceeding INR 5500 crores (approx. USD 846 million) the immediately preceding accounting year.
In line with the OECD recommendations, for cases where the MNE (or the MNE’s nominated alternate reporting entity) 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 maintaining country-by-country reporting. In such situations, the country-by-country report is not required to be filed locally.
However, India entities are required to locally file the country-by-country report in the following situations:
- Where the parent entity of the India constituent entity is ‘not obligated’ to file a country-by-country report in the country in which the ultimate parent entity or alternate reporting entity of the MNE is resident;
- Where India does not have an agreement for the exchange of the country-by-country report with the country in which the ultimate parent entity or alternate reporting entity of the MNE are resident; or
- where there has been a systemic failure of the country to exchange country-by-country reports with a country in which the ultimate parent entity or alternate reporting entity of the MNE is resident, and the failure is intimated by the prescribed authority to the India constituent of the MNE.
In these cases, Indian entities are required to locally file the country-by-country report in India; however, no due date was prescribed. Therefore, in substance, the application of this section had been on hold.
India country-by-country reporting rules that would now apply for US MNEs
The US is one of the notable countries that has not entered in an agreement for the exchange of information with India. Saudi Arabia, United Arab Emirates, Sri Lanka, Taiwan are few other prominent names.
Newly issued Notification No. 88/2018 now requires the India constituent entity of these MNEs to locally file the country-by-country report in India by 12 months from the end of the reporting accounting year.
In a relief update, the Indian Revenue has subsequently extended the due date for filing the country report to March 31, 2019, for cases which are otherwise already overdue for filing or which are due for filing by February 28, 2019.
The new notification becomes effective from December 18, 2018.
An exception to local filing will be cases where an MNE has nominated a group entity in other tax jurisdiction with which India has entered into an information exchange agreement as its alternate reporting entity to file the country-by-country report.
It is relevant to note that the requirement to file the country-by-country report locally could also arise where the threshold for filing the country-by-country report is met locally in India but not met globally. The India threshold mandating the filing of country-by-country reports is different than the threshold in other countries. For example, in the US, the threshold for filing a country-by-country report is USD 850 million.
Due date – to note
Although the 12-month time frame for filing aligns with global practices, it was expected that the tax authority would provide a more reasonable time for Indian constituent entities to file the country-by-country report. As an example, an MNE with a year ending December 2017 would be required to file within a very short time frame.
The India Income tax Act prescribes penalties in case of non-compliance with country-by-country reporting rules.
Additionally, MNEs have confidentiality and other concerns, which need to be addressed through guidance.
Systemic failure of country-by-country reporting
Notification No. 88/2018 also specifies that if the parent entity of the India constituent entity is a resident of a country or territory where there has been a systemic failure by the country or territory and the failure has been intimated to such constituent entity, the due date for submission of country-by-country report would be six months from the end of the month in which such systemic failure has been intimated to the inbound constituent entity.
Penalties for non-compliance
The penalty for not filing a country-by-country report within the prescribed timelines is as follows under the India Income tax Act, 1961:
- If failure to furnish country-by-country report continues for period of one month: 5,000 per day of default;
- If failure to furnish country-by-country report continues beyond a period of one month: 15,000 per day of default;
- For non-furnishing of the country-by-country report even after levy of penalty based on either of (i) or (ii) above (i.e., for delay beyond the date of service of penalty order based on either of (i) or (ii) above): 50,000 per day of default.
By imposing this requirement at a domestic level without waiting for a bilateral agreement, India’s government shows the seriousness of its desire to gets its hands on comprehensive information about MNEs global and India operations.
It also reflects the importance and the urgency that the Indian government is attaching to countering BEPS and to scrutinizing transfer pricing arrangements of India group companies.
With this, it would only be reasonable to say that the already aggressive Indian transfer pricing audits and disputes arising therefrom are likely to get more focused and intensive.
It will, therefore, be important for MNEs to review the information provided in the country report from a potential country risk perspective and also from the standpoint of planning opportunities to improve upon the substance of transactions.
— Madhan N, is a Partner at PricewaterhouseCoopers Private Limited, India, with functional expertise in Corporate Tax & Transfer Pricing and can be reached at firstname.lastname@example.org / +91 9840898157.