OECD / G20 BEPS Project...BEPS Group December 2015 Foreword 2. Simplicity and Certainty: The proposed provisions must be simple to administer and should not result in any uncertainties

OECD / G20 BEPS Project Recommendations for changes to

the domestic law

December 2015

BEPS Group

Page 1

Page 2

BEPS Group

Foreword

Page 3

BEPS Group December 2015

Foreword

At the outset, we would like to thank you for giving us the opportunity to provide ourrecommendations.

The approach adopted by the Government of India of seeking recommendations from stakeholders isclearly inclusive and collaborative. It is also in line with the best practices followed globally, and willcertainly help in building trust and enhancing taxpayer confidence.

We sincerely applaud the steps being taken by the Indian Government in the arena of BEPS (Base

Erosion & Profit Shifting).

The OECD has delivered the Final BEPS Package in a record time and this is also attributable to the

significant contributions made by the revenue officials of India. Although some more work is to be done

at the level of OECD, it may be right time to consider implementation of OECD Recommendations to

the extent possible. Implementation of BEPS project would mainly require (i) changes to the tax

treaties, which would be addressed by the Multilateral Agreement and (ii) changes to the domestic law.

Some Relevant Considerations

From the perspective of the Indian Government, the following considerations may be used as a basis for

changes to the domestic law:

1. Consistency with broad economic agenda of the Country: The changes in the domestic

law must be consistent with the broad economic agenda of the country and should not work

contrary to the major programmes of the Government such as:

Make in India

Digital India

Ease of Doing Business in India

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Foreword

2. Simplicity and Certainty: The proposed provisions must be simple to administer and should

not result in any uncertainties arising from interpretation thereof.

3. International best practices: Although a developing country, India is clearly amongst the

largest economies in the world. This position is likely to improve further and hence India must

adopt the internationally accepted best practices in the domestic law.

4. Precisely Targeted Remedies: It is possible that not all the base erosion problems faced by

other countries are faced by India. Before tackling any aspect, it is advisable to conduct the study

as to the exact extent, if any, of base erosion suffered by India. For instance, in some areas,

because India adopts the source basis of taxation, it is quite possible that base erosion might not

exist. Only if a serious actionable problem exists, should anti-avoidance measures be

implemented.

Even in cases where anti-avoidance measures are required, they should be precisely calibrated so

that the problem is resolved, without having any further adverse effect.

5. India as a preferred investment destination: Countries across the world compete for

foreign capital. The tax policies should ensure that India is viewed as a preferred investment

destination and should support competitiveness, attractiveness and sustainability of India.

This note primarily contains recommendations as regards changes to the domestic law.

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Page 6

Table of contents

Particulars Page no.Executive Summary 11-15

Action 1: Addressing the Tax Challenges of the Digital Economy 16-18

Action 2: Neutralising the Effects of Hybrid Mismatch Arrangements 19-22

Action 3: Designing Effective Controlled Foreign Company Rules 23-25

Action 4: Limiting Base Erosion Involving Interest Deductions and Other FinancialPayments

26-29

Action 5: Countering Harmful Tax Practices More Effectively, Taking into AccountTransparency and Substance

30-31

Action 6: Preventing the Granting of Treaty Benefits in Inappropriate Circumstances 32-33

Action 7: Preventing the Artificial Avoidance of Permanent Establishment Status 34-35

Action 8-10: Aligning Transfer Pricing Outcomes with Value Creation 36-49

Action 11: Measuring and Monitoring BEPS 50-51

Action 12: Mandatory Disclosure Rules 52-53

Action 13: Re-examine Transfer Pricing Documentation 54-67

Action 14: Making Dispute Resolution Mechanisms More Effective 68-69

Action 15: Developing a Multilateral Instrument to Modify Bilateral Tax Treaties 70-71

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Abbreviations and acronyms

Act Income-tax Act, 1961

ALP Arm’s Length Price

AP-1 Report OECD 2015 Final Report on Action Plan

BEPS Base Erosion and Profit Shifting

CbCR Country by Country Report

CFC Controlled Foreign Company

D/NI Deduction / Not Income

DD Double Deduction

Domestic Law Income-tax Act, 1961 including the Rules thereunder

ECB External Commercial Borrowings

GAAR General Anti Avoidance Rules

ITES Information Technology Enabled Services

KPO Knowledge Process Outsourcing

LOB Limitation of Benefit

MNE Multi-National Enterprise

OECD Organisation for Economic Co-operation and Development

POEM Place of Effective Management

R. No. Recommendation Number

SPV Special Purpose Vehicle

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TFDE Task Force on the Digital Economy

TP Transfer Pricing

Page 10

BEPS Group

Executive Summary

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Executive Summary

Executive Summary of specific Recommendations on OECD BEPS Packages

Certain specific comments on the OECD BEPS Packages are tabulated hereunder:

Sr.

No.

Actions Recommendations to CBDT

1 Digital Economy - To be taken up once OECD’s and Committee’s

recommendations are finalized

2 Neutralising the Effects

of Hybrid Mismatch

Arrangements

- Studies to be conducted on treatment given to hybrids in

the domestic laws of countries with which India has

maximum cross-border transactions

- Since India adopts source based taxation, it should not

raise any BEPS concerns from India perspective

3 Designing Effective

Controlled Foreign

Company Rules

- POEM meets the objective of AP-3 Report to a

reasonable extent.

- AP-3 does not make CFC mandatory as a minimum

standard

- CFC, if introduced, should be inserted as a package along

with Group Consolidation, Underlying tax credit and

other consequential provisions.

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Executive Summary

4 Limiting Base Erosion

Involving Interest

Deductions and Other

Financial Payments

- Current laws contain enough safeguards in the form of:

• TP provisions

• Exchange control regulations

• Source based taxation

• GAAR

Hence AP-4 does not call for further action in India

- Alternatively, introduce Thin Cap rules in the domestic

law keeping in mind the BEPS concerns and

requirements of certain industries

5 Countering Harmful TaxPractices MoreEffectively, Taking intoAccount Transparencyand Substance

- OECD does not seem to have found any harmful tax

practices followed by India

6 Preventing the Grantingof Treaty Benefits inInappropriateCircumstances

- Insertion of Limitation of Benefits clause in tax treaties

can be deliberated once OECD’s further work in this

regard is completed

7 Preventing the ArtificialAvoidance of PermanentEstablishment Status

- The provisions of the treaty would be amended through

the Multilateral Agreement

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Executive Summary

8 to 10 Aligning TransferPricing Outcomes withValue Creation

- Guidance to be issued to apply AP- 8 to 10

- Alignment of definition of ‘intangibles’

- Introducing “low-value adding services” in the legislation

- Simplified documentation for “low-value adding

services”

- Guidance on documentation for non “low-value adding

services”

- Aligning definition of “insignificant risk”

- Aligning “comparability factors” in Rule 10B(2)

11 Measuring andMonitoring BEPS

- Industry’s participation in the implementation process

12 Mandatory DisclosureRules

- Rules, if introduced, should be voluntary and in line with

international standards

13 Re-examine TransferPricing Documentation

- Absolute alignment with BEPS guidance and adoption of

the Model legislation to the extent required

- Detailed rules for maintaining confidentiality and use of

Country-by-Country documentation (CbCR)

- Need for revised risk assessment framework

- Filing of CbCR – one year from the end of the financial

year

- Updating CbCR – every three years

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Executive Summary

- Guidance on use of data of overseas entities

- Definition/scope of ultimate parent company , revenue,

capital, accumulated earnings, number of employees,

main business activity

- Easing of penalty provisions for non-maintenance of

documentation for the initial years

14 Making DisputeResolution MechanismsMore Effective

- Insertion of Article 9(2) in the tax treaties, where it is

absent

- Alternatively, apply MAP and bilateral APAs without

reference to Article 9(2)

15 Developing aMultilateral Instrumentto Modify Bilateral TaxTreaties

- Section 90 be amended to enable Multilateral

Agreements

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BEPS Group

Action 1 - Addressing the Tax

Challenges of the Digital Economy

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Action 1 – Addressing the Tax Challenges of the Digital Economy


R.No.

OECD’s Recommendations Recommendations to CBDT

1 The Task Force on the Digital Economy (TFDE) analysed

the following options:

(i) A new nexus in the form of a significant economic

presence

(ii) A withholding tax on certain types of digital

transactions

(iii) An equalisation levy.

OECD 2015 Final Report on Action Plan 1 (AP-1 Report)

(page 12) does not recommend any of the above options at

this stage.

AP-1 Report observes that the implementation of the

recommendations of the other Action Plans will

substantially address the BEPS issues exacerbated by the

digital economy at the level of both the market jurisdiction

and the jurisdiction of the ultimate parent company, with

The OECD recommendations are still

work in progress and we understand

that a Committee has been set up to

examine tax implications for digital

economy. We presume that the

Committee’s work will be in the

context of the “Digital India”

initiative of the Government.

We will be happy to engage with the

Committee and CBDT for further

work on this area.

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the aim of putting an end to the phenomenon of so-called

stateless income.

OECD would continue working on digital economy issues

and a report reflecting the outcome would be produced by

2020.

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BEPS Group

Action 2 - Neutralising the Effects

of Hybrid Mismatch Arrangements

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Action 2 – Neutralising the Effects of Hybrid Mismatch Arrangements


R.

No.


2 Hybrid mismatch arrangements

contemplated in OECD 2015 Final Report on

Action Plan 2 (AP-2 Report) are the

arrangements which exploit differences in the

tax treatment of an entity or instrument

under the laws of two or more tax jurisdiction

to achieve double non-taxation, including

long-term deferral (See first para on page 11

of the AP-2 Report).

Broadly, the following implications are

sought to be corrected under the AP- 2

Report:

D/NI (deduction in one country and not

taxable income in other country)

DD (deductible in both the countries –

2.1 Studies to be conducted from the Indian

perspective for adoption of the of OECD AP-2

Report recommendations in the Indian domestic

law

Before adopting recommendations of AP-2 Report, it would

be advisable to analyse the treatment given to hybrids in the

domestic laws of countries with which India has maximum

cross-border transactions.

Based on the outcome of these studies, the requirement of

insertion of OECD recommendations in the domestic law

may be evaluated.

Para 272 and 273 (on page 94) of AP-2 Report also suggests

that the hybrid mismatch rules have to be applied in co-

ordination with other jurisdictions so as to ensure

predictability of outcomes for taxpayers and to avoid the

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double deduction)

( Para 6, page 16 of AP-2 Report)

The following are the key recommendations

to neutralize D/NI and DD outcomes:

Primary rule: Payer’s country to deny the

deduction for a payment to the extent that

such payment: a) is not included in the

taxable income of the recipient in the

counterparty jurisdiction (i.e. in the

recipient’s jurisdiction) OR b) is also

deductible in the counterparty jurisdiction.

Defensive rule: If the primary rule is not

applied, then the counterparty jurisdiction

needs to include such deductible payment

in taxable income or to deny the duplicate

deduction depending upon the nature of

the mismatch.

(Para 7 to 9, page 17 of AP-2 Report)

risk of double taxation.

Do the hybrids result in BEPS from Indian

perspective?

a. Hybrid instruments

Since India:

- taxes interest in the hands of a non-resident payee on

source basis

- taxes interest received by an Indian resident or a PE

and

- levies dividend distribution tax on dividend

a hybrid instrument would not result in D/NI or DDsituation.

b. Hybrid entities

Recommendations contained in the AP-2 Report for hybrid

entities mainly require changes to the tax treaty and hence

no changes required in the domestic law.

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BEPS Group

Action 3 - Designing Effective

Controlled Foreign Company

Rules

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Action 3 – Designing Effective Controlled Foreign Company Rules


R.

No.


3 OECD 2015 Final Report on Action

Plan 3 (AP-3 Report) (page 9)

observes that the recommendations

related to CFC are not minimum

standards, but they are designed to

ensure that jurisdictions that

choose to implement them will

have rules that effectively prevent

taxpayers from shifting income into

foreign subsidiaries.

3.1 Place of Effective Management – An alternative

approach to CFC

The Place of Effective Management (POEM) concept has

been introduced effective April 1, 2015 which meets the

objectives of the AP-3 Report to a reasonable extent and it

may be worthwhile to see the effectiveness of this concept at

least for five years. Further, AP-3 Report does not mandate

adoption of CFC rules as minimum standard.

3.2 Introduction of CFC, Group taxation and other

consequential provisions

However, if it is thought appropriate to introduce CFC rules

at this stage, the following should be considered:

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Group consolidation for tax purposes

Consolidation of offshore subsidiaries should be allowed for

income-tax purposes and credit should be granted for taxes

paid in the respective jurisdictions

Underlying tax credit

If group consolidation is not considered, credit should be

allowed to the Indian parent company for the underlying

taxes paid by the overseas subsidiary / controlled company.

Other consequential changes

Amendment in section 115BBD, so as to avoid double

taxation of the same income.

Non-applicability of withholding tax provisions for

transactions with the controlled company.

The interplay between CFC and POEM needs to be

clarified.

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BEPS Group

Action 4 - Limiting Base Erosion

Involving Interest Deductions

and Other Financial Payments

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Action 4 – Limiting Base Erosion Involving Interest Deductions and Other Financial Payments

Action Plan 4 – Limiting Base Erosion Involving Interest Deductions and OtherFinancial Payments

R.No.

OECD’sRecommendations

Representation / Recommendations to CBDT

4 Introduction of Fixedand Group ratio toaddress BEPSthrough interestdeductions.

4.1 Do interest deductions result in BEPS for India?

The following suggest that BEPS through interest deductions is not aconcern for India:

The current provisions of the Income-tax Act, 1961 (thedomestic law) contains transfer pricing provisions for severalyears now but there does not appear to be any major disputesrelated to deduction for interest.

The cross-border borrowing transactions are strictly regulatedby ECB Regulations, which besides other things also regulatesrate of interest. The likelihood of base erosion through interestdeduction is likely to be more prevalent in countries whereExchange Control mechanism is not in place.

Since India has a source based rule for taxing interest, thededuction for interest does not erode the income base.

GAAR provisions would be applicable w.e.f. April 1, 2017.

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Para 10 to 17 of the AP-4 Report (page 19-21) highlightsreasons for which the existing approaches (i.e. transferpricing, withholding tax, Thin cap rules) to tackle BEPSinvolving interest are not effective. However, it needs to benoted that these existing approaches are evaluated in thereport on a stand-alone basis. When a country adopts acombination of these existing approaches, these would be farmore effective and the concerns raised in AP-4 Report may notsurvive.

India already has transfer pricing provisions, withholdingrequirements and GAAR.

Based on the above, it can be observed that the current laws containenough safeguards. Hence, AP-4 Report does not call for furtheraction in India.

The tax avoidance measures if any should be precisely targeted andfocused so as to exactly counteract any BEPS concerns, but shouldnot create a burden which goes beyond what is necessary tocounteract those concerns, to ensure that such measures are not atthe cost of the growth of the Indian economy and the broadereconomic agenda of the country.

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4.2 Adopt anti-abuse measure commensurate with theBEPS concern – Exhaust other measures such as Thin Caprules first

However, if interest deduction is a BEPS concern for India, then itmay be appropriate to first introduce Thin Cap rules in the domesticlaw, as against directly adopting recommendations of AP-4 Report.

While adopting Thin Cap rules it should be ensured that -

the rules target only those cases which raise BEPS concerns, as

against impacting most of the tax payers.

the debt / equity ratios should be decided taking into

consideration the specific features of the industry. For

example industries like infrastructure, mining, energy, deep

sea drilling etc. involve high risks and require huge upfront

investments.

the patterns / data of the existing debt / equity ratios in

various industries need to be studied. We would be happy to

provide necessary data.

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BEPS Group

Action 5 - Countering Harmful Tax

Practices More Effectively, Taking

into Account Transparency and

Substance

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BEPS Group

Action 5 – Countering Harmful Tax Practices more effectively

December 2015

Action 5 – Countering Harmful Tax Practices More Effectively, Taking into AccountTransparency and Substance

R.No.


5 OECD 2015 Final Report on ActionPlan 5 (AP-5 Report) (page 11) dealswith harmful tax practices regimefollowed by various countries to attractinvestments and the factors todetermine potential harmful regimes.AP-5 Report states that in order toavail the benefit of any preferentialregime, substantial activity test shouldbe met. (Chapter 4, para 25 and 26,page Nos. 23 and 24).

India does not seem to be following any harmful taxpractices. This is also evidenced by the AP-5 Reportwherein OECD has reviewed few of India’s regimes andfound them to be un-harmful. (Refer Table 6.2 on pageNo. 64 of AP-5 Report)

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BEPS Group

Action 6 - Preventing the Granting

of Treaty Benefits in Inappropriate

Circumstances

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Action 6 – Preventing the Granting of Treaty Benefits in Inappropriate Circumstances


Action 6 – Preventing the Granting of Treaty Benefits in Inappropriate Circumstances

R.No.


6 OECD 2015 Final Report on ActionPlan 6 (AP-6 Report) makesrecommendations for preventingtreaty abuse. These includeinsertion of Limitation of Benefits(LOB) clause in the tax treaties.

AP-6 Report does not recommend any changes in thedomestic law.

While India should ensure that the treaty benefits are notgranted in inappropriate circumstances, therecommendations as regards insertion of LOB clause in thetax treaties can be deliberated once OECD’s further work inthis regard is completed in 2016.

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BEPS Group

Action 7 – Preventing the Artificial

Avoidance of Permanent

Establishment Status

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Action 7 – Preventing the Artificial Avoidance of PE status


Action 7 – Preventing the Artificial Avoidance of Permanent Establishment Status

R.No.


7 OECD 2015 Final Report on ActionPlan 7 (AP-7 Report) makesvarious recommendations forstrengthening the provisions ofArticle 5 of the tax treaties.

7 No changes required in the domestic law

The provisions of the treaty would be amended throughthe Multilateral Agreement. No changes are required inthe domestic law.

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BEPS Group

Action 8 to 10 - Aligning Transfer

Pricing Outcomes with Value

Creation

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Action 8 to 10 – Aligning Transfer Pricing Outcomes with Value Creation


Action 8 to 10 - Aligning Transfer Pricing Outcomes with Value Creation

R.No.

Theme Recommendations to CBDT Rationale

1. An overridingrecommendation

Guidance can be issued to the effect that on issues/matters where Indian Regulations are silent, the OECD’sGuidance provided as part of the 2015 Final Reports onAction Plans 8-10 (AP-8 to 10 Reports), should begenerally adopted and followed in principle.

Being a part of the G-20group of nations, India: has been an active

participant in all theintensive rounds ofdiscussions whichhave taken place infinalising the BEPSdeliverables;

has endorsed thefinal BEPS package;and

has expressed itscommitment toimplementation ofBEPS measures.

Guidance (as suggested)in the IndianRegulations wouldessentially be a logicalconclusion to the above.

R. Theme Recommendations to CBDT Rationale

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No.2. Definition /

meaning /list of‘intangibles’

An inclusive meaning of intangibles is currently provided inExplanation (ii) to section 92B of the Income-tax Act, 1961 (theAct). The Explanation provides a list of assets which shall beconstrued to be intangibles. The intangibles have beencategorised as being those related to marketing, technology,art, data processing, engineering, customers, contracts, humancapital, location, goodwill, etc.

On the other hand, the OECD BEPS Guidance (in para 6.6 ofAP-8 to 10 Reports) provides a one line definition ofintangibles as being one “which is not a physical asset or afinancial asset1, which is capable of being owned or controlledfor use in commercial activities, and whose use or transferwould be compensated had it occurred in a transactionbetween independent parties in comparable circumstances.”

Thereafter, in paras 6.15 to 6.17 of AP-8 to 10 Reports (referAnnexure 2), there is some elaboration on marketingintangibles, trade intangibles, and unique and valuableintangibles; and paras 6.18 to 6.31 of AP-8 to 10 Reports (referAnnexure 3) provide some illustrations of what could beconstrued as intangibles and what would not.

Clearly, there currently exists an inconsistency between themeaning / definition of intangibles as provided in theExplanation (ii) to section 92B vis-à-vis the OECD BEPS

Definitions / meaningsare fundamental orbasic aspects. Analignment in this regardwould therefore beimportant and required,as implementation oradoption of subsequentBEPS guidance onintangibles mayotherwise pose achallenge.

Coherence would alsobe required from theperspective that theIndian guidelines/regulations should be inline with what is alsoexpected to be followedor adopted (as anoutcome of the BEPSdeliverables) in otherjurisdictions(particularly G-20nations and OECD

1 Financial asset has been separately defined to be any asset that is cash, an equity instrument, a contractual right or obligation to receive cash or another financial asset or to exchange financialassets or liabilities, or a derivative. Examples include bonds, bank deposits, stocks, shares, forward contracts, futures contracts, and swaps.

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Guidance. Accordingly, there is a need to align.

It is thus recommended that Explanation (ii) to section 92B ofthe Act be amended so as to adopt the definition of intangibleas provided in the OECD BEPS Guidance (in para 6.6 of AP-8to 10 Reports as referred above.

Also, it is recommended that no further categorisation orillustrative list be provided. As regards categorisation, eventhe OECD does not provide any prescription – it onlyacknowledges that there could exist different categorisationssuch as marketing / trade; routine / non-routine; hard / soft;etc. Moreover, any illustrative list is also not recommendedbecause something which is an intangible in one context maynot be an intangible in another context – and hence, anillustrative list may lead to more confusion rather than provideclarity.

member countries).

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R.No.


3. Definitionand scope oflow-valueadding intra-groupservices(paymentside)

The payment for intra-group services has been an area of perinealdispute in the Indian context. There is thus clearly a need tostreamline on various aspects relating to receipt of intra-groupservices – at least those which are ‘low value adding’.

Currently, the Indian TP Regulations do not provide anycategorisation of intra-group services which are ‘low value adding’in nature. On the other hand, OECD provides sufficient guidancein paras 7.45 to 7.50 of AP-8 to 10 Reports (refer Annexure 4). Inpara 7.45, OECD defines low value-adding intra-group services asthose which:

are supportive in nature are not part of the core business of the MNE group (i.e. not

creating the profit-earning activities or contributing toeconomically significant activities of the MNE group)

do not require the use of unique and valuable intangibles and donot lead to the creation of unique and valuable intangibles, and

do not involve the assumption or control of substantial orsignificant risk by the service provider and do not give rise to thecreation of significant risk for the service provider.

It is recommended that for identifying low value adding inboundintra-group services, the guidance (including examples) providedin paras 7.45 and 7.50 of AP-8 to 10 Reports be adopted or suitablyadapted to the Indian context. Guidance in this regard could beprovided by means of a separate circular.

Intra-group services area highly litigated area inthe Indian context, andsimplification will: provide upfront

clarity and directionfor taxpayers andRevenue whiledealing with inboundintra-group services– which will in turncurtail disputes inthis regard;

save time, cost andeffort for taxpayers,Revenue authoritiesand the judiciary;and

ensure ‘ease of doingbusiness’, andenhanceinternationalperception andinvestor confidence.

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R.No.


4. Simplifiedrequirementsfor low-valueadding intra-groupservices(paymentside)

It is recommended that for services which are identified as beinglow value adding in nature, guidance with respect to simplified ALPdetermination and simplified documentation as provided in paras7.52 to 7.64 of BEPS Actions 8-10 Final Reports be adopted (referAnnexure 5).

Guidance on “simplified documentation” for “inbound low valueadding intra group services” could be provided by means of aseparate circular (along with the circular referred above).

Same as above.

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R.No.


5. Other thannon-valueadding intra-group services(paymentside)

For inbound intra-group services which do not fall in the lowvalue adding category, the guidance as provided in paras 7.6 to7.42 of AP-8 to 10 Reports may be followed in principle.However, considering the quantum and nature of litigation thathas been witnessed in the recent past around ‘benefit test’ inrelation to receipt of intra-group services, it would be critical toissue guidance in this regard.

The guidance could outline what would typically constitutesufficient documentation to prove that services have actuallybeen rendered and benefit has been received.

Apart from this guidance, it would be worthwhile to also issueguidance on ‘cost pool determination’ (including guidance onrepresentative allocation keys, documentary evidence to supportappropriate determination and inclusion of costs, etc.).

Guidance could be issued by means of a descriptive circular or awhite paper or FAQs.

Same as above.

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R.No.


6. Categorizationof ‘incomeside’ intra-group services(i.e., outboundintra-groupservices)

In an outbound transfer pricing context, categorization of intra-group services is currently only provided in the Safe HarbourRules.

If one were to compare the low-value adding categorization ofservices as per OECD BEPS guidance provided in paras 7.45 to7.50 of AP-8 to 10 Reports, to the various categories of servicesoutlined in the Safe Harbour Rules then, the similarity islargely found with the category of ‘Information TechnologyEnabled Services’ (ITES), and there is also some overlap with thecategory of ‘Knowledge Process Outsourcing Services’ (KPOservices).

Clearly, if the categorization of intra-group services which are‘low value adding’ in nature is adopted / adapted for inbound(payment side) intra-group services (as discussed in point 3.above) then, such categorization cannot be very different in anoutbound (income side) intra-group services context.

It is therefore recommended that the Safe Harbour Rules beamended to the extent that the ITES and KPO services arediluted, and instead two new categories are introduced, i.e.,being ‘low value adding services’ and ‘other than low-valueadding services (not being software development services, orcontract R&D services)’.

The Indian Safe HarbourRules which are foroutbound (income side)intra-group servicescannot, in principle,stand independent of theOECD BEPS guidance orthe positions being takenin the inbound (paymentside) context suitablealignment would berequired.

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R.No.


7. Circular 6/2013 onconditionsrelevant toidentifydevelopmentcentresengaged incontract R&Dservices withinsignificantrisk

&

Safe HarbourRules onidentifying aneligibleassessee, withinsignificantrisk [Rules10TB(2) & (3)of the Rules]

Circular 6/ 2013 and the Safe Harbours Rules distinguish aninsignificant risk taking entity with reference to the concepts offunctions, assets (capital and intangibles), control, contract vsconduct, etc.

AP-8 to 10 Reports provide elaborate guidance on the concept ofrisks and how it links back to functions and capital, and therelevance of conduct vs contract. The underlying messagesemerging from this guidance on the one hand, and Circular 6/2013 as well as the Safe Harbours Rules on the other hand, arenot contrary to each other, but in fact, to a large extent, lendsupport to each other. The underlying messages are: Risks that may be contractually assumed by a party which does

not in fact exercise control over such risks, or does not havethe financial capacity to assume such risks would not beentitled to the returns.

Capital-rich entities without any other relevant economicactivities (“cash boxes”) will not be entitled to any excessprofits.

The conduct will supplement or replace the contractualarrangements if the contracts are incomplete or are notsupported by the conduct.

Given that elaborate guidance as part of AP-8 to 10 Reports nowexists and is also endorsed by the Indian Government, it would beappropriate to withdraw Circular 6/ 2013 and suitably amendRules 10TB(2) & (3). The amendment could state that for

To avoid duplication andany confusion amongsttaxpayers, Revenue andthe judiciary as to whichguidance / law should befollowed.

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identification of eligible assessee with insignificant risk, theOECD’s BEPS Guidance (as provided in AP-8 to 10 Reports) onrisks, functions, assets (capital and intangibles), control, contractvs conduct, etc., should be generally adopted and followed inprinciple.

(This space has been intentionally left blank)

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R.No.


8. Comparabilityfactors

Comparability factors to be considered when comparing aninternational transaction with an uncontrolled transaction, arecurrently listed as part of Rule 10B(2) of the Rules. Thecomparability factors listed therein are:

the specific characteristics of the property transferred orservices provided in either transaction;

the functions performed, taking into account assets employedor to be employed and the risks assumed, by the respectiveparties to the transactions;

the contractual terms (whether or not such terms are formalor in writing) of the transactions which lay down explicitly orimplicitly how the responsibilities, risks and benefits are to bedivided between the respective parties to the transactions;

conditions prevailing in the markets in which the respectiveparties to the transactions operate, including the geographicallocation and size of the markets, the laws and Governmentorders in force, costs of labour and capital in the markets,overall economic development and level of competition andwhether the markets are wholesale or retail.

The OECD BEPS Guidance, in para 1.36 of AP-8 to 10 Reports,on the other hand, provide the following comparability factors:

The contractual terms of the transaction.

Comparability factorsare fundamental to anytransfer pricing analysisand an alignment in thisregard is thereforenecessary.

More specificallyspeaking, in a given setof facts andcircumstances, factorssuch as ‘industrypractices’ and ‘businessstrategies’ may in fact becritical considerationswhen analysingcomparability.

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The functions performed by each of the parties to thetransaction, taking into account assets used and risksassumed, including how those functions relate to thewider generation of value by the MNE group towhich the parties belong, the circumstancessurrounding the transaction, and industrypractices.

The characteristics of property transferred or servicesprovided.

The economic circumstances of the parties and of the marketin which the parties operate.

The business strategies pursued by the parties.

Evidently, the text in bold and italics above indicates theadditional factors / guidance provided by OECD. Since adeviation exists between the Indian TP Regulations as theycurrently stand and the OECD BEPS Guidance, and given thatthe OECD BEPS Guidance has been endorsed by the IndianGovernment, it is recommended that Rule 10B(2) be amended soas to incorporate the text in bold and italics.

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R.No.

Theme OECD’s Recommendations Recommendation to CBDT

9. IncidentalPoint

The TP Guidelines issued by OECD 2010 (para7.9 and para 7.10) recognizes that where anactivity is performed by a group member solelybecause of its ownership interest in the othergroup member, such an activity would qualifyas a “shareholder’s activity”, for which nocharge should be required to be paid by theservice recipient (SPV in the instant case).These regulations further provide that cost ofraising funds for the acquisition ofparticipation by the parent companyconstitutes a shareholder activity andaccordingly, no service fee should be chargedby the parent company for such activities.

Often a parental support is provided by anIndian company to its subsidiary in the formof equity, loan or by way of a corporateguarantee extended for third party loan.Even though commercially and economicallythere is no case for a charge from the parentto the subsidiary, either in the form ofcorporate guarantee fee or interest, becauseof a deeming fiction in law, the taxauthorities end up making adjustment onguarantee fee and interest on loan.

Had interest been charged on parentalsupport by way of loan, it would have givenrise to Base Erosion under Action Plan 4 andinterest would have been disallowed in thestate in which subsidiary operate. Whenthere is no charge, transfer pricingadjustment in the residence state requiresparent company to pay tax in residencestate.

While BEPS has been introduced to avoid asituation of double taxation in eithersituation, there is double taxation.

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In case the parent company does not chargeinterest on loan, the above referred anomalygives rise to double taxation – parent endsup paying tax in India on deemed interest /corporate guarantee fee whereas thesubsidiary does not get a tax break since itrecognizes the parental support as a“shareholder function” for which thereshould be no charge.

In case the parent company charges intereston loan, in all likelihood, this interest mayget disallowed in the state of subsidiaryalthough this interest is taxable in India.

To avoid such anomaly, the internationalconcept of “shareholder’s activities” shouldbe included in the Indian domestic law froman outbound and inbound investmentperspective.

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BEPS Group

Action 11 - Measuring and

Monitoring BEPS

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Action 11 – Measuring and Monitoring BEPS


Action 11 – Measuring and Monitoring BEPS

R .No.


11 OECD 2015 Final Report on Action11 (AP-11 Report) mechanics forcollecting data by the governmentto measure implications of BEPSActions.

11 No changes required in the domestic law atthis stage

AP-11 Report requires OECD and G20 countries towork together to ensure a consistent and coordinatedimplementation of the BEPS recommendations. Whileno changes are required in the domestic law at thisstage, it is recommended that industry’s participationin the implementation process is allowed even in futureso that the necessary concerns, if any, from the industryparticipants can be raised before the law makingauthorities at appropriate times.

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BEPS Group

Action 12 - Mandatory Disclosure

Rules

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Action 12 – Mandatory Disclosure Rules


Action 12 – Mandatory Disclosure Rules

R.No.


12 OECD 2015 Final Report on ActionPlan 12 (AP-12 Report) deals withmandatory disclosure ofinformation related to aggressive orabusive tax planning.

12 Need more time to recommend rules in order tointroduce disclosure rules under domestic law. Ideally, thedisclosure requirements should be voluntary.

If rules are introduced, it should be in line withinternational standards.

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BEPS Group

Action 13 – Re-examine Transfer

Pricing Documentation

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Action 13 – Re-examine Transfer Pricing Documentation


R.No.

OECD’s Recommendations Recommendations toCBDT

Rationale

13.1 Three-tiered structure totransfer pricingdocumentation consisting of(i) a master file containingstandardised informationrelevant for allmultinational (‘MNE’)group members;(ii) a localfile referring specifically tomaterial transactions of thelocal taxpayer; and (iii)country-by-country report(‘CbCR’) containing certaininformation relating to theglobal allocation of theMNE’s income and taxespaid together with certainindicators of the location ofeconomic activity within theMNE group.

Jurisdictions should adopt alegal requirement thateligible MNE group’sultimate parent entitiesresident in their jurisdiction

The contents of the CbCRtemplate, Master File andLocal file should be thesame as recommended inAnnex I, II & III of OECD2015 Final Report onAction Plan 13 (AP-13Report).

Current documentationrequirements prescribedunder Rule 10D are fairlydetailed and more or lessaligned with the Local filerequirements laid down.Accordingly, there shouldbe no duplication inconnection withmaintenance of Local fileand Rule 10Ddocumentation.

The provisions relating toCbCR, Master File andLocal file should bebrought in by way of

The contents recommendedby the OECD are quitecomprehensive and anyfurther addition to thisrequirement would put a lotof administrative burden onthe taxpayer to comply withthe same. Therefore thereshould be an absolutealignment with BEPSguidance and no additionalrequirements should beprescribed.

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Rationale

prepare and file the CbCR.

Master file and local fileelements should beimplemented through localcountry legislation oradministrative proceduresand the master file and localfile be filed directly with taxadministrations in eachrelevant jurisdiction.

making an amendment toRule 10D of Income-taxRules, 1962. Alternatively,additional provisionscould be introduced inFinance Bill on the lines ofthe Model Legislationappended to AP-13 Report.

13.2 Jurisdictions should enforcelegal protection ofconfidentiality of the reportedinformation. Protectionincludes limitation of use ofinformation, rules on personsto whom the information maybe disclosed, etc.

The legal framework andthe informationmanagement systemsshould ensure theconfidentiality ofexchanged tax informationincluding the CbCR,Master File and Local File.For e.g., a directorate ofrisk assessment should beconstituted and all CbCRand other documentationobtained through theexchange of informationroute could be maintainedthere, with access only to

As there is a lot ofproprietary informationwhich needs to be includedin the CbCR, Master Fileand Local file, themechanism to maintainconfidentiality has to beensured to give necessarycomfort to tax payers.

Further, reliance can beplaced on the detailedguidance on theimplementation in AP-13Report.

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R.No.


Rationale

the Competent Authority.

Reference for building ofsuch framework andinformation managementsystems could be made tothe guidance in the form ofa questionnaire providedin AP-13 Report.

13.3 Jurisdictions shouldcommit to using CbCR forassessing high-level TP risk,and may be assessing otherBEPS-related risks as well.However, jurisdictionsshould not proposeadjustments to the incomeof any taxpayer simply onthe basis of data from CbCR.

CbCR received fromultimate parent entities ofMNE groups resident in thecountry, should beexchanged by theCompetent Authorities of

One of the objectives ofAction Plan 13, is toprovide tax administrationwith the necessaryinformation to conduct aninformed transfer pricingrisk assessment. In orderto align to this objective,an appropriate riskassessment frameworkshould be laid down toensure proper use of theCbCR.

There should besafeguards laid down toprevent the use of CbCR

CbCR has been acknowledgedas an important TP riskassessment tool and shouldbe used as such and not as ameans for makingadjustment. Hence, it isimportant to put a revisedrisk assessment frameworkpost introduction of theregulations governing CbCR

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R.No.


Rationale

the respective jurisdictionsusing the treaty network.

merely for making transferpricing adjustments basedon the use of the CbCR,prospectively or by re-opening assessments forpast assessment years.

There should be no powersgranted to the TransferPricing Officer / AssessingOfficer to obtain the CbCRfrom the taxpayer. TheCbCR should be obtainedby the Transfer PricingOfficer / Assessing Officeronly from the CompetentAuthority under specificconditions. For e.g.,approval of the CompetentAuthority should besought by the TransferPricing Officer / AssessingOfficer, in writing withspecific rationale for use ofthe CbCR and suchapproval should not begranted unless an

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R.No.


Rationale

opportunity has beenprovided to the taxpayerfor objecting to the same.

13.4 Not all transactions withassociated enterprises aresufficiently material. Hence, itis important that the taxadministration should setmateriality standards for CbCRand Master Files such that itdoes not impose unduehardships. Further, taxadministrations should alsoevaluate materiality standardsfor Local file

The consolidated revenuethreshold for applicabilityof CbCR provisions andMaster File should bealigned with the OECDrecommendation i.e. Euro750 Million(approximately Rs.5,500 crores)or more, tohave a uniform approach.

The threshold of Rs. 1Crore for Local file and theTP documentationrequirement under currentRule 10D needs to be re-evaluated and a higherthreshold of say, Rs. 5crores should beconsidered.

To be seen as a progressivetax administration andconsidering the Indiangovernment’s mantra foreasing the tax administration,it is important to maintainparity with the internationalcommunity, which alsogenerally seems to befollowing the OECDrecommendation.

13.5 Practices regarding timing ofpreparation of transfer pricing

The time line to prepareCbCR and file based on the

CbCR approach being new,adequate time should be

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R.No.


Rationale

documentation differ amongcountries. The differences inthe time requirements forproviding information can addto the taxpayers’ difficulties inproviding the rightinformation. Hence, it isimperative to provide adequateguidance.

materiality criterion laidout above should be oneyear from the end of therelevant fiscal year of theultimate parent of theMNE group. This wouldgive sufficient time to taxpayers to compile theinformation.

In case of different yearends being followed byoverseas constituententities, the full completeyear of the overseasconstituent entitiesimmediately preceding therelevant fiscal year of theultimate parent entity inIndia should be consideredfor collating the datarequired for CbCR. Fore.g. the ultimate parententity follows April toMarch as its fiscal yearwhile the US subsidiaryfollows calendar year, then

spent by taxadministration in suitablyimplementing the same,thereby ensuring that both,taxpayers and taxadministration are in astate of readiness.

The best practice to requirethat Local file should befinalized no later than duedate of filing of tax return,should continue.However, given thatpractices regarding timingof preparation of transferpricing documentationdiffer among countries, itmay be important to setmore practical guidelines.

Given the new CbCRapproach, penaltyprovisions would needamendment to ensure thattaxpayers are not penalizedunder bona fide

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R.No.


Rationale

for preparing the CbCR forthe year ended 31 March2017, the data of the USsubsidiary for the calendaryear 2016 should beconsidered.

In the alternative, dataused for consolidation ofaccounts for the ultimateparent entity in Indiashould be used.

There should be no burdencast on the Indiansubsidiary of the MNEGroup to comply withthese provisions if thecorresponding CbCRprovisions are not in effectin the ultimate parententity jurisdiction.

Penalty provisions for non-maintenance ofdocumentation should beeased. Further, care

circumstances.

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R.No.


Rationale

should be taken that nodocumentation relatedpenalty should be imposedfor failing to submit data towhich the MNE group didnot have access.

13.6 Jurisdictions should stipulatethat transfer pricingdocumentation should beperiodically updated and notannually, since in manysituations, the operatingconditions and thefunctional/asset/risk profile,remain unchanged.

The CbCR and the MasterFile should require updatesonly every three years,unless of course, there is a“significant change” in theoperating conditions, thefunctional/asset/riskprofile or significantbusiness reorganisation.

The thresholds for what isa “significant change”should be prescribed.

The Local File could beupdated with a new searchevery three years and onlythe financial data ofcomparables should beupdated every year.

In line with the global bestpractices, Government’s focuson ease of doing business inIndia and also keeping inmind the administrativeburden, a fair periodicity ofpreparing the three tiereddocumentation and thresholdfor “significant change”should be prescribed.

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R.No.


Rationale

13.7 Other matters The proposed draft shouldbe put up for publiccomments with sufficienttime being provided toprovide comments andrecommendations.

Adequate guidance shouldbe provided to assistclients in relation to fillingup of the CbCR. Few suchexamples are as follows:

(a)Revenue – It needs to bedefined as to what wouldbe included in Revenueand whether it should beNet Revenue or GrossRevenue. Ourrecommendation is thatRevenue should bedefined as Gross revenuederived from the sale ofproduct / service toavoid any ambiguity asto what deductions /eliminations to be

Recently, it is good to notethe practice of putting upsome important proposedchanges for publicconsultation beforefinalization. Continuing inthe same good spirit andalso, as is a globallyaccepted good practice, thedraft legislation andreporting formats, shouldbe put up for sufficienttime for publicconsultation, andthereafter, should befinalized based on thecomments /recommendationsreceived.

For avoidance of doubt, itis imperative to providesuitable explanation toavoid any anomaly andnon-reporting /misreporting.

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R.No.


Rationale

considered forcomputing Net Revenue.It should not includeother income viz.interest, rent, reversal ofprovision, etc.

(b) Related party /Constituent Entity – Thedefinition of relatedparty / ConstituentEntity, could be alignedto the definition ofAssociated Enterprise asdefined underSection 92A of theIncome-tax Act, 1961

(c)Stated Capital – It needsto be defined whetherthis would include onlyequity share capital orequity plus preferenceshare capital. Ourrecommendation is thatstated capital shouldonly include equitycapital. The term equity

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R.No.


Rationale

capital is universallyrecognized and wouldavoid any ambiguitywhile consolidating thisfigure for all the overseasconstituent entities.

(d) Accumulated earnings –It needs to be definedwhether this wouldinclude only revenuereserves or also capitalreserves.

(e)Number of employees –It needs to be clarified asto whether this reportingrequirement is for theemployees on the payroll or even for thecontractual work forceand full timeconsultants. Ourrecommendation is thatit should include theemployees on pay roll aswell as contractual workforce working on a full

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R.No.


Rationale

time basis and full timeconsultants.

(f) With respect to datamaintained for overseasentities in foreigncurrency, the averagerate of exchange for therespective foreigncurrency prevalentduring the year may besuggested for convertingthe requisite informationin Rupee term for CbCRreporting.

In the alternative, valuesused for consolidation ofaccounts in the ultimateparent company in Indiabe used.

(g)Under template 2, “MainBusiness Activity(ies)” ofeach constituent entityin the MNE group isrequired to be reported.However more clarity is

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R.No.


Rationale

required in terms ofdefining the term “MainBusiness Activity(ies)” tobe reported. For e.g., arevenue limit of say,excess of 33.33% of totalrevenue, could beapplied to determine thesame.

(h) Definition of ultimateparent company- Thesame should be defined.We recommend that thedefinition in the modellegislation relating toCbCR be considered.

Page 66

BEPS Group

Action 14 - Making Dispute

Resolution Mechanisms More

Effective

Page 67


Action 14 – Making Dispute Resolution Mechanisms more effective

Action 14 – Making Dispute Resolution Mechanisms More Effective

R.No.


14 OECD 2015 Final Report on Action14 (AP-14 Report) providesvarious recommendations formaking dispute resolutionmechanisms more effective.

14 Recommendations made by AP-14 Reportneed to be accepted

The recommendations made by the AP-14 Report wouldreduce litigation and should be accepted. Especiallyattention need to be given to the following:

Insertion of Article 9(2) in the tax treaties, where itis absent

Alternatively :o Apply MAP Article to any dispute (including

transfer pricing related) even in absence ofArticle 9(2)

o Allow bilateral APAs in absence of Article9(2)

This will support the broader objective of creating imageof investor friendly jurisdiction and ease of doingbusiness in India.

Page 68

BEPS Group

Action 15- Developing a

Multilateral Instrument to Modify

Bilateral Tax Treaties

Page 69


Action 15 – Developing a Multilateral Instrument to Modify Bilateral Tax Treaties

Action 15 – Developing a Multilateral Instrument to Modify Bilateral Tax Treaties

R.No.


15 OECD 2015 Final Report on ActionPlan 15 (AP-15 Report) deals withMultilateral Agreement.

15.1 Authorisation for signing multilateralagreements

Section 90 of the Act primarily authorizes the CentralGovernment to sign bilateral agreements. Necessaryamendment needs to be made to authorize thegovernment to sign multilateral agreements.

15.2 Guidance on interplay between bilateraland multilateral agreements

Necessary guidance need to be given to the tax payers asregards relationship between the existing bilateralagreements and the multilateral agreement.

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Documents

OECD / G20 BEPS Project...BEPS Group December 2015 Foreword 2. Simplicity and Certainty: The proposed provisions must be simple to administer and should not result in any uncertainties