Union Budget 2016 – Key Transfer Pricing proposals Customer Care No

2 The Hon'ble Finance Minister of India presented the third Budget of the Modi Government on 29 February In the backdrop of significant global slowdown and a need to jumpstart the economy, the Finance Minister's job was to strike an intricate balance between growth, fiscal consolidation and the promise to provide ease of business coupled with a non-adversarial tax regime. In the recent past, transfer pricing has been a much debated topic in corporate board rooms as well as Government ministries worldwide. The OECD alongwith the G20 and certain other countries have issued the Base Erosion and Profit Shifting (BEPS) Guideline in October 2015 emphasizing on the need to focus on conduct and substance rather than contract and legal form in tax determination. Pricing of intra-group transactions is also a potential trigger for BEPS and expectedly found a crucial place in the OECD BEPS Guidelines. One of the key measures under the BEPS Guidelines in the course of determining the conduct and substance is the documentation requirement for intra-group transactions. The documentation should not only evidence the Functions carried out by the transacting entities, Assets employed and the Risks undertaken but also should provide a bird's eye view of the entire supply chain of the group worldwide. Specific requirement relating to furnishing and maintaining of a Master File and Country-by-Country (Cubic) Report by the Group's Ultimate Parent has been provided in the BEPS Guidelines to the above effect. Customer Care No

Expectations from Budget A Master File provides a broad overview of the entire group's functioning, including the business, details relating to intangibles and the group's operating structure. A Cubic report is a document capturing a snapshot of the financial position and certain other relevant characteristics for various group entities at each country level. This would provide tax authorities a holistic perspective of the group's activities and profitability at each country level. As mentioned above, India was a part of the OECD BEPS discussion and is a signatory to the BEPS report. In various interactions with the Government officials in the recent past, the Government reiterated its commitment to adopt the aforesaid BEPS Guidelines in the Indian domestic legislation including the TP documentation requirement. Given above, the Finance Minister announced the introduction of the aforesaid documentation guidelines within the Indian domestic tax legislation as a part of the Budget The Finance Act introduces detailed provisions relating to maintaining and furnishing of the Master File and the Cubic report. The ensuing paragraphs discuss the aforesaid amendment in detail. A. OECD BEPS Recommendation on Action Plan 13 In line with the recommendations contained in the OECD report on Action 13 of the BEPS Action Plan, the three-tiered transfer pricing documentation structure consisting of following is proposed to be adopted: - a master file containing standardized information relevant for all multinational enterprises (MNE) group members; - a local file referring specifically to material transactions of the local taxpayer; and - a Cubic report containing certain information relating to the global allocation of the MNE's income and taxes paid together with certain indicators of the location of economic activity within the MNE group. 3

4 While the Finance Bill has outlined reporting requirements for Cubic report, the detailed rules for master file and local file would be prescribed in due course. B. Country-by-Country (Cubic) report (proposed Section 286) The Cubic report has to be submitted by parent entity of an international group to the prescribed authority in its country of residence. While the format of the Cubic report is to be prescribed, the broad level content has been provided in the new provision and is reproduced below (proposed section 286(3)): "(3)For the purposes of sub-section(2), there port in respect of an international group shall include,— (a) 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; (b) 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; (c) the nature and details of the main business activity or activities of each constituent entity; and (d) any other information as may be prescribed."

The above seems to be broadly in line with the Cubic content provided by the OECD BEPS report, captured hereunder: The Cubic reporting is required for an international group having an Indian parent, for the previous year , to apply only if the consolidated revenue of the international group in previous year exceeds the prescribed threshold(as per the Memorandum to the Finance Bill 2016, the threshold is indicated to be INR 5395 crore (Euro 750 million)). If applicable, then the Indian parent entity will be required to furnish the Cubic report in respect of the group on or before the due date of furnishing of return of income for the relevant Financial Year; An Indian entity, having a parent entity resident outside India, will be required to provide information regarding the country or territory of residence of the parent entity to the prescribed authority on or before the prescribed date. An entity in India belonging to an international group is required to furnish Cubic report to the prescribed authority if the parent entity of the group is resident: - in a country with which India does not have an arrangement for exchange of the Cubic report; or - such country is not exchanging information with India even though there is an agreement; and - this fact has been intimated to the entity by the prescribed authority; 5

For non-furnishing of the Cubic report by an entity which is obligated to furnish it, a graded penalty structure would apply which include Rs. 5,000 per day (if default does not exceed one month) and Rs. 15,000 per day (for the period exceeding one month) Further, for any default that continues even after service of order levying penalty, as above, then the penalty for any continuing default will be Rs 50,000/- per day In case of non-submission of information called by prescribed authority in relation to Cubic report in a timely manner, a penalty of Rs. 5,000/- per day applies. Similar to the above, if default continues even after service of penalty order, then penalty of Rs.50,000/- per day applies for default beyond date of service of penalty order; If the entity has provided any inaccurate information in the Cubic report, penalty of Rs 500,000/- applies subject to certain conditions C. Master File (proposed Section 92D(4)) The information and document in relation to master file will be furnished to the prescribed authority within such period as may be prescribed and the manner of furnishing may also be provided in the rules; However, as appearing in the Memorandum to the Finance Bill 2016, it seems that the content of the Master File would be in line with the OECD BEPS report and may contain the overview of the MNE group's business, including the nature of its global business operations, its overall transfer pricing policies, and its global allocation of income and economic activity. Non-furnishing of the information and document to the prescribed authority, a penalty of Rs. 5 lakh shall be leviable. However, reasonable cause defense against levy of penalty shall be available to the entity. 6

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