The Indian government had introduced transfer pricing documentation and reporting requirements to the Indian Income Tax Act through the Finance Act, 2001. In October 2015, the Organisation for Economic Co-operation and Development (OECD) released its final report on Action 13 regarding Transfer Pricing (TP) Documentation and Country-by-Country (CbC) reporting, under its Base Erosion and Profit Shifting (BEPS) Action Plan.
Action 13 recommended a three-tiered approach to TP documentation consisting of:
1. A master file which provides tax administrations with high-level information regarding the global business operations and TP policies of a multinational group
2. A specific local file which provides the local tax administration with information regarding material related-party transactions, the amounts involved, and the company’s analysis of the TP determinations they have made with regard to those transactions
3. A CbC reporting template which provides information on the economic activity of the multinational group
The Indian government through the Finance Act, 2016 had brought in the legislation in the Indian Income Tax Act to implement the recommendations of the OECD. This covered provisions for additional TP documentation and CbC reporting. The Central Board of Direct Taxes (CBDT), the tax administration in India, has released the final rules regarding the same on 31st October 2017, which are largely in line with the OECD guidelines.
The CBDT has fixed the threshold for the master file requirements at INR 5 billion consolidated group revenues and INR 500 million international transactions or INR 100 million in respect of purchase, sale, transfer, lease or use of intangible property. However, certain basic information regarding the master file reporting has to be filed by all entities irrespective of whether they have any international transaction.
The CbC reporting has to be done when the consolidated group revenue exceeds INR 55 billion.
All filings have to be done electronically. The due date for filing is before the filing of the tax returns, which normally falls on the 30th of November succeeding the tax year (April-March). For the tax year April 2016 – March 2017 the due date will be 31st March, 2018.
Earlier in the year, the government through the Finance Act, 2017 had introduced secondary adjustment and thin capitalization rules for entities covered by transfer pricing rules.
The secondary adjustment was brought in to ensure the actual profit allocation arising out of a primary TP adjustment. If the primary adjustment is not repatriated to India with the prescribed time, it shall be deemed to be an advance made by the Indian entity to the associated entity and interest will be computed on the advance.
As per the thin capitalization rules, interest expenses incurred by an Indian company (other than a banking or insurance company) exceeding INR 10 million on AE borrowings or borrowings guaranteed by an AE shall be restricted to the lower (a) total interest of 30% of the earnings before interest, taxes, depreciation and amortization (EBITDA); or (b) interest paid/payable to the AE. The excess interest will not be deductible while computing the taxable income. The excess interest can however be carried forward up to the following eight financial years for set off against the taxable income.