The recent development in the field of international tax regulation has facilitated the exchange of Country-by-Country (CbC) reports between India and the US. This new initiative allows corporations based in either India or the US to file their CbC reports in their home country, thereby easing the compliance burden for subsidiaries operating overseas.
Decoding the New Directive
According to this directive, multinational companies with operations and tax liabilities in both countries can now opt to file their CbC reports in their parent country. For instance, US-headquartered firms with business interests in India would no longer need to file separate CbC reports in India. Filing these reports in the US would suffice, thereby eliminating duplicated efforts and streamlining the reporting process. This is anticipated to significantly decrease the administrative load on their Indian subsidiaries.
Backdrop to The Change
This change can be traced back to the Income-tax Act that necessitates Indian subsidiaries of international companies to disclose critical financial statements from other jurisdictions where they operate. The aim of this mandate is to offer a comprehensive operational perspective of such companies to the I-T Department, particularly in areas concerning revenue and income tax payments.
Interestingly, this provision is an outcome of the Base Erosion and Profit Shifting (BEPS) action plan, later assimilated into the I-T Act.
Understanding Base Erosion and Profit Shifting (BEPS)
BEPS refers to tax planning strategies that take advantage of mismatches and gaps between the tax rules of different jurisdictions. The core objective is to reduce the overall corporation tax payable by making tax profits ‘disappear’ or shift profits to low-tax jurisdictions where there is limited or no genuine activity.
Although BEPS strategies are generally not illegal, they leverage different tax rules operating in distinct jurisdictions. BEPS holds substantial relevance for developing nations given their heavy reliance on corporate income tax, predominantly from multinational enterprises (MNEs). The BEPS initiative is a G-20 approved OECD initiative aimed at establishing more standardized tax rules globally.
| Fact | Description |
|---|---|
| Country By Country Report Exchange | India and the US can now exchange CbC reports filed by multinational corporations based in either country. |
| Goal of BEPS Initiative | The objective is to establish more standardized tax rules worldwide. |
| Impact on MNEs | BEPS holds major importance for MNEs due to their significant contribution to the corporate income tax in developing countries. |
The Implication of the New Directive
This new provision is poised to not only lessen the regulatory burden on global companies operating in India and the US, but also promote greater transparency in the international tax ecosystem. By adopting such practices, governments around the world can ensure that corporations pay their fair share of taxes in the jurisdictions where they operate, thereby curtailing aggressive tax planning strategies.