Country-by-Country Reporting and India-Maurituis Treaty.PPTX

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Country-by-Country Reporting and Amendment to India-Mauritius Treaty

Mohammed WaizeAM-TaxationNov 5, 2016

Introduction Base Erosion and Profit Shifting (BEPS) BEPS Action Plan CbC Reporting Background CbC Reporting – TDP Framework CbC Reporting Master File and Local File CbC Reporting - Content CbC Reporting - An Indian Perspective Amendment to India-Maurituis Treaty

Contents

Introduction

Base Erosion and Profit Shifting Tax Planning Strategies that exploit the gaps and mismatches in tax rules Artificially shifts profits to low or no locations Where there is little or no economic activity Resulting in little or no overall corporate tax being paid. Massive revenue loss to the governments OECD and G-20 Countries Collectively taken steps OECD was mandated to develop feasible Action Plans OECD formulated 15 Action Plans

BEPS action plan – changes to the international tax landscape

► Action 6: Prevent treaty abuse ► Action 7: Prevent the artificial avoidance of permanent establishment

status► Action 8: Consider transfer pricing for intangibles ► Action 9: Consider transfer pricing for risks and capital ► Action 10: Consider transfer pricing for other high-risk transactions

► Action 15: Development of a multilateral instrument for amending bilateral treaties

► Action 11: Establish methodologies to collect and analyse data on BEPS and actions addressing it

► Action 12: Require taxpayers to disclose their aggressive tax planning arrangements

► Action 13: Re-examine transfer pricing documentation

► Action 14: Making dispute resolutions more effective

Action plan on Base

Erosion and Profit

Shifting (BEPS)

► Action 1 : Address the tax challenges of the digital economy

► Action 2: Neutralise the effects of hybrid mismatch arrangements

► Action 3: Strengthen CFC rules

► Action 4: Limit base erosion via interest deductions and other financial payments

► Action 5: Counter harmful tax practices more effectively, taking into account transparency and substance

Action 13: CbC Reporting -- Background

September 2014 Action 13 Report established three goals for transfer pricing documentation:

• providing tax administrators with data necessary to perform risk assessments;

• ensuring that taxpayers meet requirements and appropriately report income in transfer pricing transactions; and

• permitting tax administrations with the required information to audit transfer pricing practices

The main innovation of the Guidance is to focus not on documentation of related party transactions, but on "risk assessment."

Action 13: CbC Reporting – TPD Framework

The Guidance proposed a three-tiered structure consisting of:

a master file containing standardized information relevant for all MNC group members

a local file referring specifically to material transactions of the local taxpayer; and

a country-by-country report containing certain information relating to the global allocation of the MNC's income and taxes paid together with certain indicators of the location of economic activity within the MNC group

Action 13: TPD – Master File

Master File

• MNC group's organizational chart

• Description of the MNC's business(es) (including profit drivers, major product supply chain, intercompany service agreements, main geographic markets, brief functional analysis for entities, recent restructurings/M&A)

• MNC's intangibles, e.g., list of intangibles important for transfer pricing with legal owner(s) and a general description of group's transfer pricing policies for R&D and intangibles

• MNC's intercompany financial activities, e.g., related and unrelated financing

• MNC's financial and tax positions: APAs and tax rulings relating to allocation of income

Action 13: TPD – Local File

Local File

• Local entity information, including management structure and local organization chart

• Detailed description of specific intercompany transactions between local country and entities in other countries, and copies of all material intercompany agreements executed by that entity

• Includes relevant financial information regarding transactions, comparability analysis, and selection and application of the transfer pricing method

Action 13: CbC Reporting -- Contents

CbC Report

• Aggregate CbC data about entities (and PEs) in every country to go to every tax administration (not public)

• Proposed CbC template includes: • Revenues (broken down by unrelated party, related party, and total)• Profit (loss) before income tax• Income tax paid (on cash basis) • Income tax accrued – current year• Stated capital and accumulated earnings• Number of employees• Tangible assets other than cash and cash equivalents

• Option to use “bottom-up” or “top-down” approach

CbC Reporting – An Indian Perspective

• Under the union Budget 2016, a new section on CbC reporting has been introduced viz. proposed section 286 of the Income-tax Act,1961.

Parent entity resident in India

Parent entity resident outside India, designated alternate entity resident

outside India

Entities of such group operating in India would not be obliged to furnish report if the report can be obtained

under the agreement of exchange and the prescribed authority in India has

not conveyed any systematic failure in respect of said country.

More than one entities of same

group

To be filed by parent entity

Who is required to file

The group can nominate the entity the entity that shall furnish report

on behalf of the group

Parent entity resident outside India and subsidiary co. in India

The Indian Constituent entity needs to file in India if a) India does not have agreement

providing exchange of info or b) systematic

failure of that country


Details

Aggregate information in respect of the

amount of

Each constituent entity of the group

RevenueIncluding country or

territory in which such constituent entity

operatesIncome tax paid

Stated CapitalAccumulated

EarningNo of Employees

P&L before IT

Tangible assets not being cash or cash

equivalents

The nature and details of the main business activity or

activities of each constituent entity

Any other information as may be prescribed


Master File - Objective and Features

Provide and overview of the MNE groups business, including the nature of its global business operations, its overall transfer pricing policies and its global allocation of income and economic activity.

Contain information which may not restricted to transaction undertaken by a particular entity situated in particular country.

Information in master file would be more comprehensive than the existing regular transfer pricing documentation

The master file shall be furnished by each entity to the tax authority of the country in which it operates

Provide a high-level overview in order to place the MNE group’s transfer pricing practices in their global economic, legal, financial and tax context.


Deadlines for reporting : To file a CbC report for the financial year 2016-17 before the due date of filing Return of Income i.e 30th November,2017.

Threshold : The threshold for filing the CbC report has been maintained at €750 million.

Format of the report : The format shall be notified in the Rules at a later date. However, it is proposed in the memorandum that the OECD prescribed template will be adopted.

Calling for further details : The prescribed authority may request for such document and information from the entity furnishing the CbC report for the purpose of verification. The entity shall be required to make submission within thirty days of receipt of notice or further period if extended by the prescribed authority, but extension shall not be beyond 30 days.


Penalty for non-furnishing of the report – [Section 271GB(1)&(3)] :

Penalty for submission of inaccurate information in the CbC report - 271GB(4): If the reporting entity has provided any inaccurate information in the report, the penalty would be Rs.5,00,000/-

Period of delay/default Penalty

(a) Not more than a month Rs.5,000 per day

(b) Beyond one month Rs.15,000 per day for the period exceeding one month

(c) Continuing default even after service of order levying penalty either under (a) or (b)

Rs.50,000 per day of continuing failure beginning from the date of service of order

• The amount of FTC that can be claimed in India is the lower of:

– The amount of foreign income tax paid; or

– The amount of income tax chargeable on that foreign source income in India

• A taxpayer will not be able to claim full FTC in India if the amount of income tax paid in the foreign country is higher than the amount of income tax payable in India on that foreign source income

• The DTAA’s entered by Government of India do not permit carry forward of excess FTC.

Protocol : Amendment to India-Mauritius Double Taxation Avoidance Agreement (DTAA)

• The Government of India entered in to DTAA or treaty with Mauritius in 1982.

• This treaty corroborated by Circular No 682 dated 30th March,1994 which clarified that CG from sales of shares in Indian Co’s was taxable in Mauritius only.

• In the year 2000, the CBDT further reassured through Circular No 789 dated 13th April,2000, which provided that TRC issued by the Mauritius Tax Office is sufficient to claim treaty benefit.

• Writ petitions have been filed by in Delhi HC for challenging the validity of the circular 789 and the Delhi HC has struck down the circular issued by CBDT.

• On further appeal the Hon’ble Supreme Court in Union of India v Azadi Bachao Andolan (2003), has overturned the ruling of the HC and held that under the constitution of India, the government had the power to enter into treaties with other countries and that judiciary has no power to judge the legality of treaty shopping merely because one section of thought considers it improper.

• Hence it ruled that the circular was good in law.

Protocol : Amendment to India-Mauritius Double Taxation Avoidance Agreement

• India now has a taxation rights on capital gains

• Protection to investment has been granted in relation to shares acquired before April 1, 2017.

• The rate of taxation on the capital gains is 50% of domestic tax rate arising between the transition period of April 1, 2017 to March 31, 2019.

• Such reduced rate shall apply on fulfillment of the Limitation of benefit (“LOB”) Article

• Under LOB Article, the benefit of lower tax rate on capital gains would be available to a Mauritius tax resident (‘the alienator’) only if

• The affairs of the alienator are not arranged with the primary purpose of taking advantage of the benefit of the lower rate;

• The alienator passes a ‘main purpose’ test and a ‘bona fide business’ test; and

• The alienator is not a shell/conduit company.

Protocol : Amendment to India-Mauritius Double Taxation Avoidance Agreement

• Companies not having a bona fide business activity are treated as if their affairs were arranged with the primary purpose of taking advantage of the benefit of the lower rate.

• A shell/Conduit company means any entity with negligible or nil business operations, or with no real or continuous business activities carried in Mauritius.

• A Mauritius resident company whose expenditure on operations is less than Mauritius Rupees 1.5 Million during the period of 12 months preceding the date the gains arise is deemed to be a shell/Conduit company.

• However, a Mauritius resident company shall be deemed not to be a shell/Conduit company if:

• It is listed on a recognized stock exchange in Mauritius; or

• its expenditure on operations in Mauritius is equal to or more than Mauritius Rupees 1.5 Million during the period of 12 months preceding the date the gains arise

Taxability of Capital Gain on sale of shares Acquisition of

shares prior to 1 April 2017

From 1st April,2017 to 31st March,2019

Yes No


After 31st March,2019

(Sale of Shares)Any Time

(Sale of Shares)After 31st

March,2019(Sale of Shares)


Taxable in India at Normal Rate

Capital Gain taxed in India at 50% of the domestic tax

rate, subject to satisfaction of LOB conditions

Taxable in Mauritius

(Sale of Shares)Any Time

Questions …..?????

THANK YOU

Country-by-Country Reporting and India-Maurituis Treaty.PPTX

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