The Indian government has officially mandated an intergovernmental agreement with the United States. This agreement focuses on the exchange of country-by-country (CbC) reports about multinational companies, specifically addressing income allocation and taxes paid. The ultimate intention is to effectively combat cross-border tax evasion.
Under the terms of this agreement, both nations will systematically exchange CbC reports. These reports are filed by the ultimate parent entities of multinational enterprises (MNEs) in their respective jurisdictions for every financial year starting January 1, 2016, and onwards. An implication of this agreement is that the companies which have their headquarters in the US but operate and are taxable in India no longer need to file CbC reports in India. They only need to file these reports in the US, significantly reducing the compliance burden on their subsidiaries operating out of these countries.
Background: The Role of Income-tax Act
According to the Income-tax Act, Indian subsidiaries of multinational companies must provide specific details of key financial statements from other jurisdictions where they operate. This grants the Income Tax Department a more comprehensive operational view of these companies, chiefly concerning revenue and income tax paid. This provision was originally part of the Base Erosion and Profit Shifting (BEPS) action plan, which was later incorporated into the Income-tax Act.
The Concept of Base Erosion and Profit Shifting (BEPS)
BEPS refers to tax planning strategies that exploit mismatches and gaps existing between the tax rules of different jurisdictions. Companies employ such strategies to minimize the corporation tax payable overall. This can be done by either making tax profits ‘disappear’ or shifting profits to low tax jurisdictions where there is little or no genuine activity. Although BEPS strategies are generally not illegal, they take advantage of varying tax rules in different jurisdictions.
Developing countries, which rely heavily on corporate income tax especially from MNEs, consider BEPS as a major issue. The BEPS initiative is an OECD initiative which has been ratified by the G20 to find means of creating more standardized tax rules globally.
A Glimpse into Some Important Facts
| Fact | Explanation |
|---|---|
| Intergovernmental Agreement between India and US | An agreement enabling systematic exchange of CbC reports to fight tax evasion |
| Role of the Income-tax Act | Requires Indian subsidiaries of MNCs to provide key financial details from other jurisdictions they operate in |
| BEPS | Tax planning strategies exploiting mismatches and gaps between different jurisdictions’ tax rules |
| BEPS Initiative | OECD initiative, approved by the G20, aiming for more standardised global tax rules |
Implication of the Agreement: Compliance Ease for International Companies
For international companies with operations and taxability in India but headquartered in the US, this agreement simplifies their compliance process. Their obligation of filing CbC reports is now limited to the US only. Consequently, their subsidiaries operating out of these countries are relieved from the compliance burden.