India, US reach agreement on country-by-country reporting for multinational groups

By Madhan N, PricewaterhouseCoopers Private Limited, India

The governments of India and the US have finalized an agreement for the automatic exchange of country-by-country (CbC) reports, the Indian government announced March 15.

The agreement is expected to be signed by March 31. Upon signing, US-based MNEs will no longer be required to file a CbC report in India locally.

India CbC reporting regulations

The Indian tax regulations require Indian constituent entities of multinational groups to file a CbC report in India if the MNE has consolidated revenue exceeding INR 5500 crores (approx. USD 846 million) in the immediately preceding accounting year.

In most cases where the threshold is met, the Indian entity is only required to file a notification in India providing the details of the MNE maintaining the CbC report. However, in line with the guidelines prescribed by the OECD, India’s CbC reporting regulations require Indian constituent entities of multinational groups to locally file the CbC report in the following situations:

• Where the parent entity of the India constituent entity is ‘not obligated’ to file a CbC 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 CbC 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 CbC 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.

India and US filling

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, and Taiwan are few other prominent names. The absence of the automatic exchange of CbC report agreement meant that, among others, that US-based companies would be required to file the CbC report in India.

The government of India issued Notification No. 88/2018 on 18 December 2018, which required the India constituent entity of these MNEs to locally file the CbC report in India within 12 months from the end of the reporting accounting year.  The government further allowed an extension to March 31, 2019, for cases which were otherwise already overdue for filing or which were due for filing by February 28, 2019.

The India Income tax Act prescribes penalties in case of non-compliance with country-by-country reporting rules. Additionally, MNEs had concerns regarding the confidentiality of the information to be filed, as well as the additional compliance to be undertaken in India. 

Government announcement

Until today, it was understood that a bilateral competent authority agreement for exchange of CbC reports was under negotiation between India and the US. However, is was unclear whether the two countries would finalise and sign the agreement for exchanging CBC Report by 31 March.

The effect such an agreement would enable both countries to exchange CbC reports filed by the ultimate parent entities of international groups in the respective jurisdictions, pertaining to the financial years commencing on or after 1 January, 2016.

As a result, Indian constituent entities of international groups headquartered in the US, who have already filed CbC reports in the US, would not be required to locally file the CbC reports of their international groups in India.

This development comes as a great relief to India constituent entities of US-based multinationals which are present in large numbers in India. The US is one of the largest sources of foreign direct investment in India.

To note:

It is relevant to note that the relief from the requirement to locally filing the CbC report in India would apply only to those MNEs who have filed their CbC report in the US for financial year commencing on or after January 1, 2016 or, alternatively, 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.

That is to say, MNEs who have not filed their CbC report in the US for the financial year commencing on or after January 1, 2016, and neither have nominated another group entity (in a jurisdiction with which India has an exchange of CBC agreement) as its alternate reportee, will still be required to file their CBC Report in India.

Concluding remarks

A formal announcement from the Indian government regarding the signing of the bilateral competent authority agreement between India and the US has been long-awaited and is a relief to many constituent entities in India belonging to international groups with parent entities in the US.

Indeed, providing access to CbC reports through an international exchange mechanism has been a preferable option for most international groups over a potential local filing.

The above also reflects the seriousness of the governments to collaborate and co-operate on tax matters.  With CbC reporting becoming a reality and the increased cooperation between countries on tax matters, as is also evident that it will be important for the MNEs to evaluate their international tax positions from all angles, and from the standpoint of planning opportunities to improve upon the substance of transactions.   

— Madhan N is a partner at PricewaterhouseCoopers Private Limited, India.