Country by Country Reporting in India – Action Plan 13 of OECD BEPS

The OECD i.e., the Organisation for Economic Co-operation and Development recommended a three-tier documentation as part of the Base Erosion and Profit Shifting (BEPS) package – Action Plan 13. The three-tier documentation includes the following:

1. Country by Country Report (CbCR)
2. Master File
3. Local File

Following this, India introduced the provisions relating to Country-by-Country Reporting under the Income Tax Act, 1961 through Finance Act 2016. India already had provisions whereby the local entities of the Multinational Enterprises (MNEs) are required to maintain the transfer pricing documentation. The additional responsibilities placed upon them are for the master file and country-by-country report.

Data to be Reported in CbCR

In CbCR, the group needs to provide the details of revenue generated, profits earned, retained earnings, taxes paid, etc. for each of the entities in the MNE group regardless of the country in which the multinational enterprise is located. This shows the information of each entity in the group and gives an understanding of the transfer pricing policy followed by the group as a whole.

What is a Constituent Entity?

Before understanding the requirements of CbCR reporting in India, it is essential to understand the meaning of constituent entities. The constituent entity has been explicitly defined under the income tax law. As per Section 286(9)(d) of the Income Tax Act, 1961, "constituent entity" means, —

1. any separate entity of an international group that is included in the consolidated financial statement of the said group for financial reporting purposes, or maybe 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;
2. any such entity that is excluded from the consolidated financial statement of the international group solely on the basis of size or materiality; or
3. 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 the such permanent establishment for financial reporting, regulatory, tax reporting or internal management control purposes;

Now, let’s understand the country-by-country reporting threshold limit and CbCR reporting requirements under the income tax law.

CbCR Reporting in India – Section 286 of the Income Tax Act, 1961

CbCR reporting in India is governed by Section 286 of the Income Tax Act, 1961. As per the income tax law in India, the constituent entities of MNE Groups are required to undertake CbCR compliances if they have a consolidated revenue of Rs. 64 billion (i.e., € 750 million as per the international standards). It was Rs. 55 billion earlier that got revised to Rs. 64 billion after the release of Notification No. 31/2021 dated 5th April 2021 primarily due to changes in the exchange rate. 

Therefore, a parent entity or an alternate reporting entity (AER) of an international group shall be required to prepare and furnish the Country-by-Country report within 12 months after the reporting accounting year ends if it is resident in India. In other cases (i.e., where the parent entity or alternate reporting entity is not resident in India), the constituent entity that is resident in India shall notify the details of the parent entity or AER to the prescribed income tax authorities that is filing the CbCR. This information will help the government in getting information and access to the CbCR report through the exchange of information with other countries.

However, the constituent entity resident in India shall be mandatorily required to make CbCR reporting in India in the following cases:

1. The parent entity is not under obligation to file CbCR in its jurisdiction or,
2. The parent entity of the international group is the resident of a country that is not having an agreement with India for the exchange of information or,
3. There is a systemic failure in the country

In the above cases, the accounting year to be followed by the constituent entity shall be the same as that of the parent entity. Further, where there are multiple entities in an MNE group, only a single constituent entity shall be required to file the CbCR.

Forms to be Furnished for CbCR

Following are the different forms for CbCR reporting to be furnished by different entities:

For non-furnishing of the report by an entity that is obligated to furnish it, a graded penalty structure would apply: -

1. if the default is not more than a month, a penalty of Rs. 5000/- per day shall apply;
2. if the default is beyond one month, a penalty of Rs 15000/- per day for the period exceeding one month shall apply;
3. for any default that continues even after service of order levying penalty either under (a) or under (b), then the penalty for any continuing default beyond the date of service of order shall be @ Rs 50,000/- per day;

In case of delayed submission of information before the prescribed authority when called for, a penalty of Rs 5000/- per day applies. Similar to the above, if the default continues even after the service of the penalty order, then a penalty of Rs. 50,000/- per day applies for default beyond the date of service of the penalty order;

If the entity has provided any inaccurate information in the report and, -

• The entity knows of the inaccuracy at the time of furnishing the report but does not inform the prescribed authority;

or

• The entity discovers the inaccuracy after the report is furnished and fails to inform the prescribed authority and furnish the correct report within a period of fifteen days of such discovery; 

or

• If the entity furnishes inaccurate information or document in response to a notice of the prescribed authority, then a penalty of Rs.500,000/- shall apply;

Above were the detailed provisions governing the filing of Country-by-Country reports (CbCR) in India by different entities. In case you need any assistance in relation to transfer pricing, master file, local file, or CbCR reporting in India, feel free to contact the ASC Group.

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