• By ADMIN
• Posted 07 Mar, 2023
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Multinational Entities liability to keep, maintain and report details and documents

CA.Selvakumar Selvaraj

Introduction

This article is an attempt to explain changes made by Government of India in the maintenance and reporting of details and documentations by MNEs in India. Indian income-tax law in line with guidelines from Organisation for Economic Cooperation and Development (OECD) has made certain changes in the details and documentations to be maintained and reported by Multinational enterprises in India. This is brought into force to curb tax avoidance; treaty abuse and double non-taxation in the international taxations. Every entity having international footprint from or to India has to take appropriate steps to adhere to these rules to avoid future litigations. These prescribed documentations are three-dimensional reporting, consisting of local file, Master File and Country by Country Report (CbCR). Local file deals with the entity level information and reporting. Master File deals with reporting of international group details and reporting. CbCR deals with reporting the group’s consolidated details which includes country wise related entities and revenue earned, expenditure shared, and taxes paid etc.

1. THE LOCAL FILE:

All issues starts with international transaction, which means (for the purpose of transfer pricing provisions of income-tax law) a transaction between two or more associated enterprises, either or both of whom are non-residents, in the nature of purchase, sale or lease of tangible or intangible property, or provision of services, or lending or borrowing money, or any other transaction having a bearing on the profits, income, losses or assets of such enterprises, and shall include a mutual agreement or arrangement between two or more associated enterprises for the allocation or apportionment of, or any contribution to, any cost or expense incurred or to be incurred in connection with a benefit, service or facility provided or to be provided to any one or more of such enterprises.

A transaction entered into by an enterprise with a person other than an associated enterprise shall be deemed to be an international transaction entered into between two associated enterprises, if there exists a prior agreement in relation to the relevant transaction between such other person and the associated enterprise, or the terms of the relevant transaction are determined in substance between such other person and the associated enterprise where the enterprise or the associated enterprise or both of them are non-residents irrespective of whether such other person is a non-resident or not.

The Local file: details & documents to be kept, maintained & reported.

Whoever has entered into an international transaction, where the aggregate value, as recorded in the books of account exceeds one crore rupees or entered into specified domestic transaction (SDT) shall keep and maintain the following details and documents:-

Penalty for failure to keep, maintain & report: 2% of International Transactions or SDT

a. a description of the ownership structure of the assessee enterprise with details of shares or other ownership interest held therein by other enterprises.

b. a profile of the multinational group of which the assessee enterprise is a part along with the name, address, legal status and country of tax residence of each of the enterprises comprised in the group with whom international transactions or specified domestic transactions, as the case may be, have been entered into by the assessee, and ownership linkages among them.

c. a broad description of the business of the assessee and the industry in which the assessee operates, and of the business of the associated enterprises with whom the assessee has transacted.

d. the nature and terms (including prices) of international transactions or specified domestic transactions entered into with each associated enterprise, details of property transferred or services provided and the quantum and the value of each such transaction or class of such transaction.

e. a description of the functions performed, risks assumed and assets employed or to be employed by the assessee and by the associated enterprises involved in the international transaction or the specified domestic transaction

f. a record of the economic and market analyses, forecasts, budgets or any other financial estimates prepared by the assessee for the business as a whole and for each division or product separately, which may have a bearing on the international transactions or the specified domestic transactions entered into by the assessee

g. a record of uncontrolled transactions taken into account for analysing their comparability with the international transactions or the specified domestic transactions entered into, including a record of the nature, terms and conditions relating to any uncontrolled transaction with third parties which may be of relevance to the pricing of the international transactions or specified domestic transactions, as the case may be

h. a record of the analysis performed to evaluate comparability of uncontrolled transactions with the relevant international transaction or specified domestic transaction.

i. a description of the methods considered for determining the arm's length price in relation to each international transaction or specified domestic transaction or class of transaction, the method selected as the most appropriate method along with explanations as to why such method was so selected, and how such method was applied in each case.

j. a record of the actual working carried out for determining the arm's length price, including details of the comparable data and financial information used in applying the most appropriate method, and adjustments, if any, which were made to account for differences between the international transaction or the specified domestic transaction and the comparable uncontrolled transactions, or between the enterprises entering into such transactions.

k. the assumptions, policies and price negotiations, if any, which have critically affected the determination of the arm's length price.

l. details of the adjustments, if any, made to transfer prices to align them with arm's length prices determined under these rules and consequent adjustment made to the total income for tax purposes.

m. any other information, data or document, including information or data relating to the associated enterprise, which may be relevant for determination of the arm's length price.

Period of Maintenance: The above details and documents are to be maintained for 8 years from the end of the relevant assessment years.

Transfer Pricing Study

Usually, it would be a study which helps the MNEs to compile all the above said details and documents and justify the price at which transactions were carried out between related entities (AEs). This documentations study plays vital role in income-tax proceedings on transfer pricings litigations. Effective study on these documentations would help entities to appropriately price their transactions and supports to effectively encounter litigation. Further, every person who had entered into international transactions or specified domestic transactions (irrespective of transactional limits) required to file Form 3CEB for the international transactions or specified domestic transactions entered into in the year, mentioning the price at which those transactions were carried out and arriving “Arm’s Length Price” (ALP) to justify the price at which transacted. This can be done only based on effective transfer pricing study for the year.

Penalty for failure to furnish Form 3CEB: Maximum of INR 1,00,000

2. THE MASTER FILE:

CONSTITUENT ENTITY OF AN INTERNATIONAL GROUP

Any constituent entity of an international group resident in India shall keep and maintain and report certain details and documents:-

What is “Constituent entity” and “International group”?

"constituent entity" means,—

 (i)  any separate entity of an international group that is included in the consolidated financial statement of the said group for financial reporting purposes, or may be so included for the said purpose, if the equity share of any entity of the international group were to be listed on a stock exchange;

 (ii)  any such entity that is excluded from the consolidated financial statement of the international group solely on the basis of size or materiality; or

(iii) any permanent establishment of any separate business entity of the international group included in sub-clause (i) or sub-clause (ii), if such business unit prepares a separate financial statement for such permanent establishment for financial reporting, regulatory, tax reporting or internal management control purposes;

"international group" means any group that includes,—

 (i)  two or more enterprises which are resident of different countries or territories; or

 (ii)  an enterprise, being a resident of one country or territory, which carries on any business through a permanent establishment in other countries or territories;

All Constituent entity of international group resident in India shall keep and maintain and report the details and documents:-

1. a list of all entities of the international group along with their addresses.
2. a chart depicting the legal status of the constituent entity and ownership structure of the entire international group.
3. a description of the business of international group during the accounting year including;-
   1. the nature of the business or businesses.
   2. the important drivers of profits of such business or businesses.
   3. a description of the supply chain for the five largest products or services of the international group in terms of revenue and any other products including services amounting to more than five per cent of consolidated group revenue.
   4. a list and brief description of important service arrangements made among members of the international group, other than those for research and development services.
   5. a description of the capabilities of the main service providers within the international group.
   6. details about the transfer pricing policies for allocating service costs and determining prices to be paid for intra-group services.
   7. a list and description of the major geographical markets for the products and services offered by the international group.
   8. a description of the functions performed, assets employed and risks assumed by the constituent entities of the international group that contribute at least ten per cent of the revenues or assets or profits of such group.
   9. a description of the important business restructuring transactions, acquisitions and divestments.

The above said details and documents shall be filed by the constituent entity of an international group resident in India before income-tax authorities online by way of Form 3CEAA. (Master File). This form has two parts, namely Part-A and Part-B. Every person, being a constituent entity of an international group resident in India shall file mandatorily Part-A of this Form 3CEAA. Part-B of this Form shall be consisting of the details and documents listed out above which needs to be filed if the following conditions are fulfilled by the constituent entity of an international group resident in India:-

a. If the consolidated group revenue of the international group, of which such person is a constituent entity, as reflected in the consolidated financial statement of the international group for the accounting year, exceeds 500 crore rupees.

                                     AND

b. The aggregate value of international transactions during the accounting year, as per the books of account, exceeds fifty crore rupees, or in respect of purchase, sale, transfer, lease or use of intangible property during the accounting year, as per the books of accounts, exceeds 10 crore rupees.

Form 3CEAA – Part A is mandatary for all the cases, irrespective of other conditions. Penalty for failure to furnish Form 3CEAA: Maximum of INR 5,00,000

What if more than one constituent entity of an international group in India?

Any one constituent entity can be designated by the international group. In respect of this a Form 3CEAB shall be filed by the constituent entity who had been designated by the international group informing that they are the one who is required to file Form 3CEAA. This intimation in Form 3CEAB shall be made 30 days prior to due date for filing Form 3CEAA, which normally  would due on 31^st October every year.

3. CbCR: COUNTRY BY COUNTRY REPORTING BY MNEs

When consolidated group revenue exceeds 6400 Crores for a year, Form 3CEAD (CbCR Report) to be filed online within 12 months from the end of accounting year. Form 3CEAD requires the following details and documents:-

1. the aggregate information in respect of the amount of revenue, profit or loss before income-tax, amount of income-tax paid, amount of income-tax accrued, stated capital, accumulated earnings, number of employees and tangible assets not being cash or cash equivalents, with regard to each country or territory in which the group operates.
2. the details of each constituent entity of the group including the country or territory in which such constituent entity is incorporated or organised or established and the country or territory where it is resident.
3. the nature and details of the main business activity or activities of each constituent entity; and
4. any other information as may be prescribed

Report as to who has to file this Form 3CEAD (CbCR Report) in the Group?

For the purpose of filing Form 3CEAD every constituent entity of international group resident India except parent entity which is resident in India, shall file Form 3CEAC, two months prior to due date for filing Form 3CEAD (Due date: 12 months from the end of the reporting period) reporting to Income-tax authorities the following:-

1. Whether it is the alternate reporting entity of the international group?
2. The details of the parent entity or the alternate reporting entity, if any, of the international group, and the country or territory of which the said entities are resident

Form 3CEAC is mandatary for all the cases whether Form 3CEAD filed in India or Not. Also not required when consolidated turnover less than 6400 cores.

The filing of CbCR Report in Form 3CEAD.

1. If the Parent of international group is resident in India, it has to file this Form 3CEAD. (or)

2. If any of the constituent entity of international group resident in India designated by the international group to file this Form 3CEAD. This designated entity is called as Alternate Reporting Entity; (or)

3. A constituent entity of an international group , resident in India, other than the above two category, shall furnish Form 3CEAD in respect of the international group for a reporting accounting year, if the parent entity is resident of a country or territory,—
   1. Where the parent entity is not obligated to file the report of the nature referred to in Form 3CEAD
   2. With which India does not have an agreement providing for exchange of the report of the nature referred to in Form 3CEAD; or
   3. There has been a systemic failure of the country or territory and the said failure has been intimated by the prescribed authority to such constituent entity:

In this case Form 3CEAE to be filed by the constituent entity of an international group who had been designated by the group in this regard.

Penalty for failure to furnish CbCR: INR 5,000/Day, if less than a month, INR 15,000/day, if failure beyond a month

Conclusion:

Each and every business transaction with persons outside India must be carefully studied in line with transfer pricing regulations and documentations to be maintained to make their affairs trouble free. Considering the timeline being reduced for replying to Income-tax department for online notices, one must be ready with required documentations to submit immediately. It is always better to prepare appropriate documentations before filing of ITR and relevant Forms and in worst case scenario before end of the relevant assessment year. One may required to submit study report and documentation to the department within 10 days of notice. Preparing this documentation may not be possible within such days. Take charge!

post your queries to selvakumar@ssacas.com