Agreement provides for automatic exchange of CbC reports filed by parent entities of MNEs
India and the U.S. signed an inter-government agreement for the automatic exchange of country-by-country (CbC) reports, which will reduce the compliance burden for Indian subsidiary companies of U.S. parent companies. This is a key step in making India compliant with the Base Erosion and Profit Shifting (BEPS) project, of which it is an active participant.
“This Agreement for Exchange of CbC Reports, along with the Bilateral Competent Authority Arrangement between the two competent authorities, will enable both the countries to automatically exchange CbC reports filed by the ultimate parent entities of multinational enterprises (MNE) in the respective jurisdictions, pertaining to the years commencing on or after January 1, 2016,” the government said in a release.
The Base Erosion and Profit Shifting (BEPS) Action Plan adopted by the Organisation for Economic Co-operation and Development (OECD) and G20 countries in 2013 recognised that the way forward to mitigate risk from base erosion and profit shifting was to enhance transparency. Against this background, a template was released in 2014, which outlined how MNEs could report the required information for each tax jurisdiction in which they do business. These are called the country-by-country reports.
MNEs are also required to identify each entity within the group doing business in a particular tax jurisdiction, and to provide information about the business activities each entity conducts. This information is to be made available to the tax authorities in all jurisdictions in which the MNE operates. This was seen as placing a huge compliance burden on the subsidiary companies of these MNEs.
“It [the inter-governmental agreement] would also obviate the need for Indian subsidiary companies of U.S. MNEs to do local filing of the CbC reports, thereby reducing the compliance burden,” the government release added.
“The much awaited India-U.S. agreement for exchange of CbC information has been signed,” Vijay Iyer, national leader, Transfer Pricing at EY India said. “It’s a huge respite for subsidiaries of U.S. head-quartered companies. The signing of the agreement further revalidates the keen willingness of Indian and U.S. tax authorities to engage and amicably resolve issues for taxpayers.”
Base erosion and profit shifting refers to the activities of multinational corporations to shift their profits from high tax jurisdictions to lower tax jurisdiction, thereby eroding the tax base of the high tax jurisdictions and depriving them of tax revenue. In order to combat this, many countries entered into agreements to share tax information with each other to enhance transparency and make such profit shifting that much harder.