Country-by-Country Reports Agreement | 30 Apr 2019

India has notified the inter-governmental agreement with the US for exchange of country-by-country (CbC) reports on multinational companies regarding income allocation and taxes paid in order to help check cross-border tax evasion.

  • This agreement will enable both the countries to automatically exchange CbC reports filed by the ultimate parent entities of multinational enterprises (MNEs) in the respective jurisdictions to the financial years commencing on or after January 1, 2016.
  • That is, the Companies headquartered in the US but having operations and taxability in India now need not file country-by-country (CbC) reports in India.
    • For such international companies, filing CbC reports in the US would be sufficient.
  • This will reduce the compliance burden on their subsidiaries operating out of these countries.

Background

  • The Income-tax Act requires Indian subsidiaries of multinational companies to provide details of key financial statements from other jurisdictions where they operate.
  • This provides the I-T Department with a better operational view of such companies, primarily with regards to revenue and income tax paid.
  • The provision was a part of the Base Erosion and Profit Shifting (BEPS) action plan and later incorporated in the I-T Act also.

Base Erosion and Profit Shifting (BEPS)

  • BEPS is a term used to describe tax planning strategies that exploit mismatches and gaps that exist between the tax rules of different jurisdictions.
  • It is done to minimize the corporation tax that is payable overall, by either making tax profits ‘disappear’ or shift profits to low tax jurisdictions where it is little or no genuine activity.
  • In general BEPS strategies are not illegal; rather they take advantage of different tax rules operating in different jurisdictions.
  • BEPS is of major significance for developing countries due to their heavy reliance on corporate income tax, particularly from multinational enterprises (MNEs).
  • The BEPS initiative is an OECD initiative, approved by the G20, to identify ways of providing more standardised tax rules globally.