What do you understand by Country by Country (CbC) Reporting? Discuss OECD's Base Erosion and Profit Shifting initiative.

Model Answer

Model Answer:

Country-by-Country Reporting (CbCR) is a form of reporting by multinational enterprises (MNEs) initiated by the Organisation for Economic Co-operation and Development (OECD) in the Base Erosion and Profit Shifting (BEPS) Action 13 Report.

• It is part of the OECD's Base Erosion and Profit Shifting (BEPS) Action Plan 13.
• A CbC report provides local tax authorities visibility to revenue, income, tax paid and accrued, employment, capital, retained earnings, tangible assets and activities of the concerned MNE.
• In essence, CbC Report is an annual return that breaks down key elements of the financial statements by jurisdiction.
• This CbC report is used as a corroborating material by Income-tax Authorities in carrying out a revenue risk assessment. It specifies certain information including:
  • (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.

Background:

• Recently, the Central Board of Direct Taxes (CBDT) notified rules for furnishing Country by Country (CbC) specifying information pertaining to all large multinational enterprises (MNEs).
• Joint Director of Income-tax (Risk Assessment)-1 has been designated as the Income-tax Authority before whom particulars of the parent entity and alternate reporting entity would be notified.
• The Organisation for Economic Cooperation and Development (OECD) had developed an Action Plan called "Base Erosion and Profit Shifting (BEPS) Action Plan 13" to ensure that a multinational enterprise would report its profit correctly where it is earned.
• Under BEPS Action Plan 13, all large multinational enterprises (MNEs) are required to prepare a CbC report with aggregate data on the global allocation of income, profit, taxes paid and economic activity among tax jurisdictions in which they operate.
• As per corresponding provisions of Indian Income Tax laws, every MNE group which has a constituent entity resident in India is mandated to notify its parent entity and alternate reporting entity and the countries where such entities are resident.
• Such parent entity or alternate reporting entity is required to furnish a report called Country-by-Country Report specifying certain information including 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.
• It is also required to furnish 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.
• The nature and details of the main business activity or activities of each constituent entity is also to be furnished.
• Central Board of Direct Taxes(CBDT) had notified rules for the purpose and the income tax authority for the purpose shall be the Joint Commissioner as may be designated by the Director General of Income tax (Risk Assessment).
• In view of the above amendment and in exercise of the powers conferred by Section 286 of the Act, the Director General of Income Tax (Risk Assessment) has designated the Joint Director of Income Tax (Risk Assessment)-1 as the Income Tax Authority for the purpose of section 286 of the Act, with effect from April 1, 2020.
  
  

Base Erosion and Profit Shifting (BEPS):

The (OECD)’s Base Erosion and Profit Shifting (BEPS) initiative seeks to close gaps in international taxation for companies that allegedly avoid taxation or reduce tax burden in their home country by engaging in tax inversions (moving operations) or by migrating intangibles to lower tax jurisdictions.

• The OECD has issued 15 Action Items to address the main areas where they feel companies have been most aggressively accomplishing this shifting of profit — addressing the digital economy, treaty abuse, transfer pricing documentation, and more.
• BEPS Action Item 13, in particular, aims to transform transfer pricing documentation, forcing multinational corporations to reconsider how transfer pricing details are reported to local tax authorities as well as worldwide with country-by-country reporting.
  
  

  Organization for Economic Cooperation and Development (OECD): The Organization for Economic Cooperation and Development (OECD) is a unique forum where the governments of 36 member states with market economies work with each other, as well as with more than 70 non-member economies to promote economic growth, prosperity, and   sustainable development. The Organization provides a setting where governments can compare policy experiences, seek answers to common problems, identify good practice and coordinate domestic and international policies. Today, OECD member countries account for 63 percent of world GDP, three-quarters of world trade, 95 percent of world official development assistance, over half of the world’s energy consumption, and 18 percent of the world’s population.

  
  

  Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS):

  • The Multilateral Convention to Implement Tax Treaty Related Measures (MLI) to Prevent Base Erosion and Profit Shifting (BEPS) is an outcome of the OECD/G20 project to tackle base erosion and profit shifting, which is resorted to by multinational corporations through tax planning strategies by exploiting gaps and mismatches in tax rules.
  • India has ratified the multilateral convention in 2019 to implement OECD's project on checking tax evasion, and the provisions enshrined in the framework will come into effect from fiscal 2020-21 for bilateral tax treaties.
  • The Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (BEPS) was signed by in 2017.
  • The MLI will modify India’s tax treaties to curb revenue loss through treaty abuse and base erosion and profit shifting strategies by ensuring that profits are taxed where substantive economic activities generating the profits are carried out.
  • The MLI will be applied alongside existing tax treaties, modifying their application in order to implement the BEPS measures. 
  • Out of 93 CTAs notified by India, 22 countries have already ratified the MLI as on date and the Double Taxation Avoidance Agreement (DTAA) with these countries will be modified by MLI.
  • For the remaining CTAs, effect of MLI will take place as and when these countries ratify the MLI. 

  Conclusion:

  Country by Country (CbC) Reporting will provide tax authorities with information to help them assess transfer pricing risks and further make determinations on how they allocate tax audit resources.