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    Significance Of Internal Audit

    1. Introduction:

    Internal audit provides effectiveness of organisation’s internal control system, risk management, governance. Internal audit looks beyond the financial transactions and extends to advisory services, organisation growth, policy matters, work environment and relevant recommendations to the management etc.

    Global regulations such as FCPA in US, UK Bribery Act, SOX Act, COSO, Fraud Risk Management (FRM) by RBI and introduction of IFC (Internal Financial Controls) in companies Act,2013 are the few witness stating the seriousness for requirement of Fraud detection mechanism.

    There are instances where organisations extricated from frauds and financial hardship due to early detection and corrective measures by the internal audit team. Internal audit facilitates the organisation to take timely decisions and emphasize on proactive environment than reactive, which is vital in the dynamic economy.

    1. Objective:

    This article aims at illustrating few significant aspects explaining the benefits of internal audit.

    1. What is Internal Audit?

    According to the Institute of Chartered Accountants of India (ICAI), “Internal audit is an independent management function, which involves a continuous and critical appraisal of the functioning of an entity with a view to suggest improvements thereto and add value to and strengthen the overall governance mechanism of the entity, including the entity's strategic risk management and internal cont rol system.”

    According to the Institute of Internal Auditors (IIA), “internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization's operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of risk management, control, and governance processes”.

    Accordingly, Internal Audit can be broadly understand as management’s independent activity to facilitate the management to -

    ?         Improve and add value in governance mechanism.

    ?         Strengthen the strategic risk management and internal control system.

    4. Why Internal Audit?

    Considering the objectivity of internal audit, it can be viewed as amanagement independent activity to strengthen its own organisation than a statutory requirement. Internal auditors provide the governing body and senior management with comprehensive assurance based on the highest level of independence and objectivity within the organization.

    4.1 Major Benefits:

    4.1.1 Facilitates strong system to compliance with law:“Ignorantia juris non excusat” means ignorance of law excuses no one. In the present world of business there are so many stringent norms mandated by regulators, further law is being revised continuously, which demands continuous updation. However it might be the difficult for organisational staff, who majorly concentrate on execution of day to day operations. Further, sometimes organisations may not afford as many professionals.


    An effective internal audit team with versatile experts can provide organisation a strong system to compliance with the law.


    4.1.2 Facilitates informed decisions by the management: in-time quality information helps in quality decisions; internal audit will provide the requisite analysed data to make effective decisions by the management. Instances are there where analysis done by the internal audit team helped management to take vital decisions wrt business expansion such as manufacture of profitable by product, optimisation of ideal resources etc.


    4.1.3 Facilitates implementation of effective internal control system: Internal audit examines the policies and procedures of an organisation on a regular basis and ensures the effectiveness of internal control system in force. For instance finding the absence of maker checker control in bills processing will curb processing of fake bills by implementing maker checker control.


    4.1.4 Facilitates to strengthen the risk assessment process: Due to increase of complexity in business process new risk factors are emerging. Internal audit plays vital role in evaluating inherent and non inherent risks exist in the business and thereby to mitigate the risk.


    4.1.5      Facilitates dedicated review of operations and Fraud detection: with the expansion of business, management oversight dilutes in review of operations which gives ample of opportunities for fraudulent operations. Internal audit with dedicated review of operations will put check to the emerging frauds. Artificial entries in pay roll detected during internal audit will put an end to the fraud in salary payments.

    4.1.6_ Facilitates pro activeness than reactive nature: Internal audit facilitates the regular review of operations and through its timely review and information it enables the management to be a proactive than a reactive.

    4.1.7 Protect interest of the investors: All investors can’t be a part of management; they may not have insight into all the operations and process. Internal audit plays a vital role in protecting the interest of the investors. An effective audit system will boost up the confidence in the investors about the effective performance of their organisation.

    4.2 Requirement under Indian Companies Act 2013 applicable to Companies only:

    As per section 138 of Indian Companies Act 2013 read with Rule 13 of Companies (Accounts) Rules, 2014, appointment of internal auditor is mandatory for the following nature of companies.


    Listed Company

    Unlisted Public


    Private Company

    Paid up share capital (during

    preceding F.Y.)

    Always applicable

    Not less than

    Rs. 500Millions


    Turnover (during preceding F.Y.)

    Always applicable

    Not less than

    Rs. 2000Millions

    Not less than

    Rs. 2000Millions

    Outstanding Loans / borrowings

    from banks/Financial Institutes

    (at any point of time during

    preceding F.Y.)

    Always applicable

    Not less than

    Rs. 1000Millions

    Not less than

    Rs. 1000Millions

    Outstanding deposits (at any point

    of time during preceding F.Y.)

    Always applicable

    Not less than

    Rs. 250Millions



    1. Conclusion:

    Effective internal audit is one of the major pillars in the growth of an organisation. Internal Audit is a prerequisite for every emerging organisation in the dynamic business environment. However unless the Internal auditor treated as admonitor and backed by management, effectiveness will be mere fancy. Hence, pervasive perception towards internal auditor is required to be changed and to achieve its objectivity internal audit should be recognised as intramural mechanism of the organisation.

    Establishing a professional internal audit activity should be a governance requirement for all organisations. This is not only important for larger and medium sized organisations but also may be equally important for smaller entities , as they may face equally complex environments with a less formal, robust organisational structure to ensure the effectiveness of its governance and risk management process.

    This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.


    • Meaning: It is an allowance provided by the employer to his employee as a part of salary to meet the cost of rented house taken by the employee for his stay.


    • Governing section: Sec 10(13A) of the Income tax act, 1961.


    • Taxability provisions:


    1. Conditions:
    1. HRA exemption can be claimed only if employee stays in a rented house and pays rent for the house.


    1. The rented premises must not be owned by him otherwise the whole amount which he has received as HRA will be fully taxable.


    • The deduction will be available only for the period during which the rented house is occupied by the employee and not for any period after that.


    1. Taxability: The amount of exemption of HRA is to be considered minimum of the following three.


    1. Actual HRA received from Employer
    2. Rent paid (minus) 10% of salary*
    • 50 % of salary* if employee lives in metro city** or 40 % salary if employee lives in non-metro city



    • Salary means (Basic Pay + DA + Fixed percentage of commission on turnover). **Metropolitan cities are Mumbai, Delhi, Chennai, and Calcutta.


    • Other points:


    1. Exemption is available even if the house is owned by close relative (Wife or husband or father or mother) and for which rent is paid by employee through bank transfer.
    2. To avail exemption there is no requirement that the employee should not own a house.


    • Examples:


    1. X resides in Mumbai and he gets Rs.7,00,000 as basic salary. He receives Rs. 2,00,000 as HRA. Rent paid by him is Rs. 1,50,000.Then HRA exemption will be calculated as follows.

    Solution: As per the above formula minimum of 3 is the amount of exemption. so, (i)Actual HRA received = 2,00,000


    • Rent paid minus 10% of salary = 1,50,000-70,000 = 80,000
    • 50% of salary = 7,00,000*50% = 3,50,000

    Minimum of the above is 80,000.

    So taxable HRA = Actual HRA received – Exemption = 2,00,000-80,000 = 1,20,000.







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    SBS Interns' Digest                                                                                                                


    1. Suppose in the above problem rent paid is 80,000 and basic salary is 10,00,000 then (i)Actual HRA received = 2,00,000

    (ii) Rent paid (minus) 10% of salary = 80,000-1,00,000 = (20,000) (iii) 50% of salary = 10,00,000*50% = 5,00,000


    Minimum of the above is (20,000)by which it can be understood that no HRA exemption is available.


    The entire amount received as HRA from employer is taxable.


    Deduction in respect of Rent paid, If HRA is not received (U/S 80GG)


    • Chargeability: Sec 80GG of the Income tax act, 1961.


    • Applicability: Individuals & HUF


    • Conditions: Upon satisfaction of the following conditions an assessee is allowed deduction under Sec 80GG.


    1. Assessee shall be self-employed and/or a salaried person who is not in receipt of HRA at any time during the previous year.
    2. He or his spouse or minor child or HUF of which he is member should not own any residential accommodation at the place where he ordinarily resides or performs duties of his office or employment or carries on his business or profession or


    1. Owned by the assessee at any other place, but the value of which is not determined under sec 23(2)(a) or Sec 23(4)(a) as the case may be [i.e. Annual Value as Nil].


    If all the above conditions were satisfied the employee should give declaration in form 10BA to claim deduction u/s 80GG


    • Amount of deduction:The lower of the 3 is the amount eligible for deduction under Sec 80GG.


    1. Rent paid (minus) 10 percent of Adjusted total income


    1. 2000 per month(Limit has been increased to Rs 5000/- per month from AY 2017-18 as per proposed Budget 2016)


    1. 25 percent of the Adjusted total income


    1. i) “Adjusted Total income” Means


    Gross total Income (minus) Long term capital Gain (minus) Short term Capital Gain u/s 111A (minus) Deductions u/s 80C to 80U (Except 80GG) (minus)anyForeign Income u/s 115A or 115D.


    • Sec 111A:If an assessee has a short term capital gain arising from transfer of equity shares of a company or unit of an equity oriented fund and such transaction had occurred on or after the date on which Chapter VII of the Finance Act, 2004 comes into force and such transaction is chargeable to Securities transaction tax under that chapter then the amount of Income tax calculated on Short term capital gain is 15 Percent.




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    HRA & 80GG under Income Tax Act,1961



    SBS Interns' Digest                                                                                                                


    • Sec 115D:This section says that in case of assessee being Non-resident Indian, no deductions of chapter VI-A should be allowed if his gross total income consist of only income from investment or income from long term capital gains or both.


    This section also says that if Gross total income includes any income referred above then the gross total income shall be reduced by the amount of such income and deductions under chapter VI-A are allowed as if the gross total income so reduced were the gross total income of the assessee.




    1. Let Mr X is a salaried employee of PQR Ltd in Hyderabad having income from salary as 8,00,000 (HRA is not provided by the employer).He pays Rs 10,000 as rent per month. He also had a Long term capital gain of Rs 2,00,000. Deduction under section 80C is 1,00,000. He owns a residential house in Vizag which is being let out. Can Mr X claim deduction under Sec 80GG?


    Solution:Mr X is a salaried employee and he does not own any residential accommodation in place of his employment but he owns at other place i.e. Vizag which is being let-out so Mr X can claim deduction under 80GG.


    Amount of deduction as per above provisions is calculated as follows:

    Gross total income = 8,00,000+2,00,000 = 10,00,000.

    1. 1,20,000 – (10,00,000-2,00,000-1,00,000)*10% = 50,000
    2. 2000*12 = 24,000
    • 7,00,000*25% = 1,75,000

    Lower of the above three is 24,000. So amount of deduction under Sec 80GG is 24,000.


    1. Suppose in the example (a) if Mr X does not Let out the property at Vizag and showing GAV of his house as Nil?


    Solution:Mr X cannot claim exemption under sec 80GG since he shows his GAV at Nil i.e. the house is shown as self occupied property.


    1. f) Suppose in the example (a) HRA is provided by the employer to Mr X then?


    Solution: Mr X cannot claim deduction under Sec 80GG since he is receiving HRA from the employer.


    Let Mr X is a salaried employee who had worked for PQR Ltd in Hyderabad for 11 months having income from salary as 8,00,000 (HRA is not provided by the employer) and remaining months for XYZ Ltd for a salary of 20,000 per month (Including HRA). He pays Rs 10,000 as rent per month. He also had a Long term capital gain of Rs 2,00,000. Deduction under section 80C is 1,00,000. He owns a residential house in Vizag which is being let out. Can Mr X claim deduction under Sec 80GG?


    Solution:Mr X cannot claim deduction under Sec 80GG since he received HRA for the previous year from the 2nd Employer.




    Banks require that a security be offered up as collateral on the account in exchange for cash. This security can be a tangible asset, such as stock in hand, raw materials or some other commodity. The credit limit extended on the cash credit account is normally a percentage of the value of the security offered. Interest is charged not on the sanctioned amount but on the utilized amount.


    ?Corporate Term Loan:


    A loan from a bank for a specific amount that has a specified repayment schedule and a floating interest rate. Term loans almost always mature between one and 10 years.


    Banks tend to classify into two:






    ?Intermediate-term loans usually run less than three years, and are generally repaid in monthly instalments from a business's cash flow.


    ?Long-termloans can run for as long as 10 or 20 years and include additional requirements such as collateral and limits on the amount of additional financial commitments the business may take on.


    This helps the company in funding


    ?Ongoingbusiness expansion,


    ?Repayinghigh cost debt,

    ?Technology up gradation,


    ?Implementing early Retirement Scheme

    ?Supplementing working capital


    The Corporate term loan has also structured under FCNR(B) scheme as well, with the option of switching the currency denomination at the end of the interest periods.




    ?Ofglobalinterest rates trends vis-à-vis domestic rates to minimize the debt cost.


    ?Maycarryfixed/floating rates





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    SBS Interns' Digest                                                                                                                




    Trade finance signifies financing for trade, and it concerns both domestic and international trade transactions. A trade transaction requires a seller of goods and services as well as a buyer. Various intermediaries such as banks or financial institutions can facilitate these transactions by financing the trade.


    Facilities provided by Bank:


    ?Intermediaries – banks can act as intermediaries for documents & funds flow in international transactions as transfer through banks is more secure.


    ?Pre-shipment loans – this is working capital for purchasing raw materials, processing & packaging of export commodities. Most common form is packing credit where the exporter gets concessional interest rates.


    ?Post-shipment loans – these loans help exporters bridge their funding requirements when they export on deferred payment basis i.e. credit.




    • Bill Discounting o Forfaiting


    o Factoring

    o Bill discounting & factoring can also happen for domestic transactions.

    o Bank has recourse to the seller since in case of non-payment by the buyer after credit period expiration; the seller must compensate the bank.


    o Bill discounting is always with recourse.

    o In factoring, a bank can discount bills with/without recourse & even with partial recourse. This is called Assignment of Receivables.


    ?International trade payment mechanisms:


    o Letter of credit


    o Cash in advance – buyer pays seller before shipment of goods.

    • Open account or credit – this means that payment is made on an agreed upon future date. This is very risky for a seller unless he has very strong relationship with the buyer or the buyer has excellent credit rating. There are no guarantees & collecting payment often becomes a tedious



    • Cash Management Services (CMS) – It has no credit risk for the bank. It is a pure administrative service for the corporate. The client maintains only one account with the bank. Cash management encompasses receivables management, payables management & liquidity management. Banks are using better technologies for cash management by connecting to ERP systems.






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    Types of Bank Finance in India



    SBS Interns' Digest                                                                                                                


    ?Letterof Credit:


    A letter of credit is an also called Documentary Credit (DC). The bank lends its guarantee of payment to the buyer. The bank also guarantees payment to the seller provided he ships the goods & complies with the terms of agreement. Here seller takes credit risk on the bank instead of buyer.


    Types of Letter of Credit:




    • Recoverable letter of credit o Standby Letter of credit


    o Irrecoverable letter of credit




    • Confirmed letter of credit o Unconfirmed letter of credit o Back-to-Back letter of credit o Clean letter of credit


    ?Structured Finance:


    The Financing techniques tailored to special needs or constraints of issuers or investors& Solving problems that are not easily solved by conventional financing techniques.


    It is a sector of finance to transfer risk by using complex legal and corporate entities.


    The essence of structured finance activities is the pooling of economic assets (e.g. loans, bonds, mortgages) and subsequent issuance of a prioritized capital structure of claims, known as tranches, against these collateral pools.






    ?Underwriting/Syndication of corporate loans & project loans ?Secondarypurchase and sale of loan products ?Mergers


    ?Hedgingofcurrency & interest rate exposures


    In India, the Hotel & Restaurant Approval & Classification Committee (HRACC), a division under Ministry of Tourism is entrusted with the activity of classification of the Hotels into either Star Category Hotels (5 Star Deluxe, 5 Star, 4 Star, 3 Star, 2 Star & 1 Star) or Heritage Category Hotels (Heritage Grand, Heritage Classic & Heritage Basic) by inspecting & assessing the hotels based on the facilities and services offered. 

    As per ‘Guidelines for Classification of Hotels’ issued by Ministry of Tourism (Hotel &Restaurant Division), ‘Paid Transportation on call’ is compulsory in hotels of 3 Star & above and Heritage Hotels. However, in order to provide the customer a greater luxury and to stay ahead in the competition, even hotels below 3 star rating are also providing transportation on call that is facility of making the cab available on call.

    Country By Country Reporting - Action 13 - BEPS Project

    Action 13 of the action plan on base erosion and profit shifting (BEPS action plan, OECD, 2013) requires the development of “rules regarding transfer pricing documentation to enhance transparency for tax administration, taking into consideration the compliance costs for business. The rules to be developed will include a requirement that MNEs provide all relevant governments with needed information on their global allocation of the income, economic activity and taxes paid among countries according to a common template”.

    In response to this requirement, a three-tiered standardised approach to transfer pricing documentation has been developed.

    First, the guidance on transfer pricing documentation requires multinational enterprises (mne’s) to provide tax administrations with high-level information regarding their global business operations and transfer pricing policies in a “master file” that is to be available to all relevant tax administrations. A brief checklist of info to be filed/maintained is provided in the later part of the article.

    Second, it requires that detailed transactional transfer pricing documentation be provided in a “local file” specific to each country, identifying material related party transactions, the amounts involved in those transactions, and the company’s analysis of the transfer pricing determinations they have made with regard to those transactions. Local files are basically the TP documentations maintained as per the local tax laws (rule 10D currently in India)

    Third, large mne’s are required to file a country-by-country report that will provide annually and for each tax jurisdiction in which they do business the amount of revenue, profit before income tax and income tax paid and accrued. It also requires mne’s to report their number of employees, stated capital, retained earnings and tangible assets in each tax jurisdiction. Finally, it requires mne’s to identify each entity within the group doing business in a particular tax jurisdiction and to provide an indication of the business activities each entity engages in. This is basically presenting and populating the data in the following tables:

    Taken together, these three documents (master file, local file and country-by-country report) will require taxpayers to articulate consistent transfer pricing positions and will provide tax administrations with useful information to assess transfer pricing risks, make determinations about where audit resources can most effectively be deployed, and, in the event audits are called for, provide information to commence and target audit enquiries. This information should make it easier for tax administrations to identify whether companies have engaged in transfer pricing and other practices that have the effect of artificially shifting substantial amounts of income into tax-advantaged environments.

    Countries participating in the BEPS project agree that these new reporting provisions, and the transparency they will encourage, will contribute to the objective of understanding, controlling, and tackling BEPS behaviours.

    The specific content of the various documents reflects an effort to balance tax administration information needs, concerns about inappropriate use of the information, and the compliance costs and burdens imposed on business. Some countries would strike that balance in a different way by requiring reporting in the country-by-country report of additional transactional data (beyond that available in the master file and local file for transactions of entities operating in their jurisdictions) regarding related party interest payments, royalty payments and especially related party service fees. Countries expressing this view are primarily those from emerging markets (argentina, brazil, people’s republic of china, colombia, india, mexico, south africa, and turkey) who state they need such information to perform risk assessment and who find it challenging to obtain information on the global operations of an mne group headquartered elsewhere. Other countries expressed support for the way in which the balance has been struck in this document. Taking all these views into account, it is mandated that countries participating in the BEPS project will carefully review the implementation of these new standards and will reassess no later than the end of 2020 whether modifications to the content of these reports should be made to require reporting of additional or different data.

    Consistent and effective implementation of the transfer pricing documentation standards and in particular of the country-by-country report is essential. Therefore, countries participating in the OECD/G20 BEPS project agreed on the core elements of the implementation of transfer pricing documentation and country-by-country reporting. This agreement calls for the master file and the local file to be delivered by mne’s directly to local tax administrations. Country-by-country reports should be


    filed in the jurisdiction of tax residence of the ultimate parent entity and shared between jurisdictions through automatic exchange of information, pursuant to government-to-government mechanisms such as the multilateral convention on mutual administrative assistance in tax matters, bilateral tax treaties or tax information exchange agreements (TIEAs). In limited circumstances, secondary mechanisms, including local filing can be used as a backup.

    Threshold limit for applicability: These new country-by-country reporting requirements are to be implemented for fiscal years beginning on or after 1 january 2016 and apply, subject to the 2020 review, to mnes with annual consolidated group revenue equal to or exceeding euro 750 million. It is acknowledged that some jurisdictions may need time to follow their particular domestic legislative process in order to make necessary adjustments to the law.

    In order to facilitate the implementation of the new reporting standards, an implementation package has been developed consisting of model legislation which could be used by countries to require mnc groups to file the country-by-country report and competent authority agreements that are to be used to facilitate implementation of the exchange of those reports among tax administrations. As a next step, it is intended that an xml schema and a related user guide will be developed with a view to accommodating the electronic exchange of country-by-country reports.

    It is recognised that the need for more effective dispute resolution may increase as a result of the enhanced risk assessment capability following the adoption and implementation of a country-by-country reporting requirement. This need has been addressed when designing government-to-government mechanisms to be used to facilitate the automatic exchange of country-by-country reports.

    Jurisdictions endeavour to introduce, as necessary, domestic legislation in a timely manner. They are also encouraged to expand the coverage of their international agreements for exchange of information. Mechanisms will be developed to monitor jurisdictions’ compliance with their commitments and to monitor the effectiveness of the filing and dissemination mechanisms. The outcomes of this monitoring will be taken into consideration in the 2020 review.

    Changes expected in Budget 2016:

    The Indian government in the upcoming budget in February end would be announcing the changes in the Indian TP regulations to be on par with the global updates in realtion to the BEPS project and CBCR reporting. The Indian counterparts of the global MNE’s should be maintaining the TP documentations (local files) in line with the global reporting’s as part of the CBCR or global TP documentations to avoid inconsistencies. With growing transparency and exchange of information’s it would be a very interesting period to see as to how the litigation statistics would respond.

    Some Basic Questions to ponder upon:


    1. When is the first year companies will be expected to file?


    The latest action 13 report suggests that countries participating in the OECDBEPS project will require groups to file in 201 7 in respect of FY16 results.


    1. What will happen if the ultimate parent company is located in a country which has not implemented CBC reporting?


    The OECD agreement builds in a response for situations where a company’s parent jurisdiction does not implement (e.g., the parent is in the Cayman Islands), which is direct filing by the company in every country or possibly the substitution of a lower tier entity to serve as the parent for CBC collection and exchange purposes.


    1. What does the OECD mean by the term multinational group? Is it true that companies will not need to file if they are part of a privately owned group?


    Action 13 refers to multinational enterprises (mnes) though it does not define mnes. Guidelines for multinational enterprises OECD201 1 gives the following description:


    “a precise definition of multinational enterprises is not required for the purposes of the guidelines. These enterprises operate in all sectors of the economy. They usually comprise companies or other entities established in more than one country and so linked that they may coordinate their operations in various ways. While one or more of these entities may be able to exercise a significant influence over the activities of others, their degree of autonomy within the enterprise may vary widely from one multinational enterprise to another. Ownership may be private, state or mixed”


    The latest implementation guidance provides that smaller and medium size enterprises (smes) with annual consolidated revenue of less than€750 million in the preceding year will not be required to file a CBC report. It states that no special industry exemptions should be provided, no general exemption for investment funds should be provided, and no exemption for non-corporate entities or non-public corporate entities should be provided.


    Accordingly, unless a group falls within the sme definitionall groups holding overseas operations that form part of their consolidation will need to file, regardless of ownership structure.

    1. Who is the reporting mne? In a large multinational group, it is possible that consolidated accounts are prepared for financial investors at more than one level? For example, group Bis a 65% subsidiary of company A with the remaining 35% of shares being publically held and prepares consolidated financial statements.

    Action 13 states that: ”a reporting mne is the ultimate parent entity of an mne group.”. In the case outlined above, in our view, only company A would have to submit the CBC report. The notes on the master file suggest that it would be possible to present the data on a divisional basis where for instance the business divisions operate independently. This courtesy does not seem to be extended to CBC reporting. However, if it would aid understanding and follow up, it might make sense to file addendum CBC reports broken down on divisional lines.

    1. What do companies need to consider in terms of preparing for real CBC reporting and master file/ local file?

    Simply giving the OECD list of data points to internal audit and asking them to confirm that they can provide the data is likely to result in a rather mechanical result without the tax impact being considered. This is really something that should be done in cooperation between tax and accounting people.

    Companies should consider whether they can get all the information e.g., independent subcontractors, or how they would be translating their figures from local to group currency in case they would report on local GAAP..

    Consistency should be kept in mind here both in terms of consistency between the CBC report, master file and local file and also that the underlying TP documentation is consistent to "the message" in the CBC report delivered to the tax authorities. The outcome of a risk assessment analysis performed by the tax authorities based on the CBC report might be linked to other actions or information (hybrids/exchange of information - rulings etc).

    1. Confidentiality?

    Action 13 requires tax authorities to ensure confidentiality of the report be maintained. However, mnes should prepare that certain aspects could become public. In certain countries, there is political agitation to make the documentation public. In the UK, both the labour and conservative party manifestos open the possibility of making the information public. The likelihood is high that questions from tax authorities and ensuing controversy will get media attention.

    Master File Details:

    Organization structure

    Business description





    Financial and tax


    Structure chart:

    Important drivers

    of business profit

    Overall strategy




    for the group

    Annual consolidated

    financial statements

    u Legal ownership

    u Geographic


    Supply chain of:

    List of important

    Identification of

    financing entities

    description of

    existing unilateral

    Advance Pricing


    (APAs) and other

    tax rulings

    ? 5largest products/

    services by turnover

    ? Products/services

    generating more

    than 5% of turnover

    intangibles and

    legal owners


    Main geographic

    markets of above


    List of important



    Details of financial

    transfer pricing




    List and brief

    description of

    important service


    R&D and intangible

    transfer pricing





    Functional analysis

    of principal

    contributions to

    value creation by

    individual entities

    Details of

    important transfers







    divestitures during

    fiscal year





    This article is contributed by Partners of SBS and Company LLP – Chartered Accountant Company You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

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