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    CBCR Implementation Guidance

    Country By Country Reporting – Implementation Guidance:

     

    Currently, CBCR compliances has become a matter of concern for all multinational enterprises (MNE). The Organization for Economic Cooperation and Development (OECD) as part of the BEPS project has been issuing guidance to the action points specified by it. Recently on 6 April 2017, the OECD released an updated version of the Guidance on the Implementation of Country-by-Country Reporting (‘the Guidance’) which has addressed five new issues:

     

    • The definition of terms “related party revenues” & “revenue” used in the CbCR;
    • The definition of total consolidated group revenue;
    • The accounting principles for determining the existence of and membership in a group;
    • Treatment of major shareholding; and
    • Transitional filing options for MNE groups.

     

    1. Definition of related party and revenues

     

    The Guidance clarifies that the revenue referred to in Table 1 of CbCR shall include extraordinary income and gains from investment activities. While this may not necessarily reflect just the operating results of the constituent entities, it would at least do away with the ambiguity on what constitutes ‘extraordinary income’ and varying yardsticks that MNE groups would apply.

     

    The Guidance further mentions that “related parties” in Table 1 of CbCR, which are defined as “Associated Enterprises” in the Action 13 report should be interpreted as ‘Constituent Entities’ listed in Table 2 of the CbCR. In the Indian context, this is defined in section 286 of the Income Tax Act 1961 (‘the Act’) largely aligned to the OECD definition in the Action 13 report which includes permanent establishments and does not give any leeway in terms of materiality of a company in terms of the group size.

     

    1. Definition of the total consolidated group revenue

     

    The Guidance clarifies that for determining the total consolidated group revenue (to see if the threshold of EUR 750 million is breached by a MNE group), all of the revenue reflected in the consolidated financial statements should be used. Further, in line with the definition of revenues for Table 1, the Guidance also provides that the jurisdictions are allowed to require inclusion of extraordinary income and gains from investment activities in the total consolidated group revenue if such inclusion is called for under the applicable accounting rules.

     

    The applicable accounting standard therefore could either push companies into the realms of CbCR or save it from having to comply with CbCR filing.

    Country By Country Reporting – Implementation Guidance:

     

    Currently, CBCR compliances has become a matter of concern for all multinational enterprises (MNE). The Organization for Economic Cooperation and Development (OECD) as part of the BEPS project has been issuing guidance to the action points specified by it. Recently on 6 April 2017, the OECD released an updated version of the Guidance on the Implementation of Country-by-Country Reporting (‘the Guidance’) which has addressed five new issues:

     

    • The definition of terms “related party revenues” & “revenue” used in the CbCR;
    • The definition of total consolidated group revenue;
    • The accounting principles for determining the existence of and membership in a group;
    • Treatment of major shareholding; and
    • Transitional filing options for MNE groups.

     

    1. Definition of related party and revenues

     

    The Guidance clarifies that the revenue referred to in Table 1 of CbCR shall include extraordinary income and gains from investment activities. While this may not necessarily reflect just the operating results of the constituent entities, it would at least do away with the ambiguity on what constitutes ‘extraordinary income’ and varying yardsticks that MNE groups would apply.

     

    The Guidance further mentions that “related parties” in Table 1 of CbCR, which are defined as “Associated Enterprises” in the Action 13 report should be interpreted as ‘Constituent Entities’ listed in Table 2 of the CbCR. In the Indian context, this is defined in section 286 of the Income Tax Act 1961 (‘the Act’) largely aligned to the OECD definition in the Action 13 report which includes permanent establishments and does not give any leeway in terms of materiality of a company in terms of the group size.

     

    1. Definition of the total consolidated group revenue

     

    The Guidance clarifies that for determining the total consolidated group revenue (to see if the threshold of EUR 750 million is breached by a MNE group), all of the revenue reflected in the consolidated financial statements should be used. Further, in line with the definition of revenues for Table 1, the Guidance also provides that the jurisdictions are allowed to require inclusion of extraordinary income and gains from investment activities in the total consolidated group revenue if such inclusion is called for under the applicable accounting rules.

     

    The applicable accounting standard therefore could either push companies into the realms of CbCR or save it from having to comply with CbCR filing.

     

    The Guidance also specifically recognizes that in the case of financial entities, gross amounts from transactions may not be recorded in their financial statements, the item(s) considered similar to revenue under the applicable rules should be used in the context of financial activities. The Guidance captures a specific example of interest rate swap wherein revenue is reported on a net basis and the same is what would be used to determine the total consolidated group revenue.

     

            3. Accounting principles/ standards for determining the existence of and membership of group

    For the purpose of determining the constituent entities of a group, the Guidance recommends companies having their shares listed in a public stock exchange to follow the consolidation rules in the accounting standards already used by the group. For other companies, the OECD has provided an option to either use local GAAP of the jurisdiction of the ultimate parent entity or IFRS unless the jurisdiction of the ultimate parent entity mandates the use of a particular accounting standard.

     

    The choice of a particular accounting standard becomes important in terms of the following;

     

    • Which entity/ group would an entity be considered as part of for determining the group revenue.

     

    • Whether an investment fund company would be required to consolidate its financial statements.

     

    1. Treatment of major shareholding

     

    The Guidance leaves it to the prevailing accounting standard to determine how much of the revenue of the entity is to be included in the groups consolidated financials where minority interest exists. A pro-rata basis or 100 % of the entities revenues could be used for the revenue threshold reporting revenues in the relevant Tables.

     

    1. Transitional filing options for MNEs

     

    OECD recommends that countries implement CbCR for periods commencing January 2016 for which the last day of filing the CbCR is 12 months from the end of the fiscal year (‘Applicable Deadline’). For countries that are not aligned with these dates, transitional issue arises. To overcome this, jurisdictions may accommodate voluntary filing of CbCR in their jurisdiction of tax residence (‘parent surrogate filing’). The Guidance also lists out countries which have already enabled the parent surrogate filing for fiscal periods commencing on or after 1 January 2016 in their jurisdictions which inter alia include countries such as China, United States of America (‘US’) and Japan.

     

    The Guidance also provides that, inter alia, where the CbCR filing has been undertaken by the ultimate parent entity (‘UPE’) or surrogate parent entity (‘SPE’) resident in a particular jurisdiction before the Applicable Deadline, and there exists a qualifying competent authority agreement between UPE/ SPE tax jurisdiction and that of the constituent entities’ tax jurisdiction, then there ought to be no filing obligations in the constituent entities’ jurisdiction.

     

    An issue that Indian MNE Groups may have to immediately grapple with is what happens with respect to constituent entities resident of tax jurisdictions which are yet to sign the MCAA but have CbCR filing obligations which fall before the Indian filing deadline of 30 November 2017 (one such example could be China).

     

    Updated -UN TP Manual:

    On 7 April, 2017, United Nations (UN) has published updated TP Manual that contains new chapters on intra-group services, cost contribution arrangements and on the treatment of intangibles; the updated UN TP manual incorporates developments relating to Base Erosion and Profit Shifting (BEPS) project including revised guidance on documentation and business restructuring. The updated version has been divided into 4 parts for better clarity –

     

    1. Transfer pricing in a global environment,
    2. Substantive guidance on arm’s length principle,
    3. Practical implementation of TP regime and
    4. Country practices;

     

    The following are the new chapters that are incorporated as part of the updated UN TP Manual:

     

    Intra-group services

     

    The chapter is based on the rationale that if specific group members do not need the activity and would not be willing to pay for it if they were independent, the activity cannot justify a payment, and further, any incidental benefit gained solely by being a member of an MNE group, without any specific services provided or performed, should be ignored.

     

    The concept of benefit test is explained under various situation such as services are provided to meet specific need of AE and when centralized services are provided along with examples. The Chapter states the 4 situations where charge is not justified as benefit test is not met viz. shareholder activities, duplication of services, benefit arising only out of passive association with MNE group and incidental benefit giving appropriate examples.

     

    The chapter also elaborates upon various method to determine arm's length price, direct and indirect charge mechanism and allocation keys. The Chapter provides for 2 safe harbour mechanisms for low value services and minor intra-group expenses.

     

    Cost contribution arrangements

     

    The Chapter covers issues such as value of CCA contributions, treatment of government subsidies, predicting expected benefits, CCA entry, withdrawal and termination and CCA guidelines and

     

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