Base Erosion Profit Shifting (“BEPS”)

We can assist in determining the overall strategy of the MNE group in light of
the BEPS provisions and assist with the new compliance requirements arising as a result of such projects. In addition, we can also assist in analysing various intangibles and determine whether group members contributing towards the development, enhancement, maintenance, protection and exploitation of intangibles are being remunerated appropriately in line with the Significant People’s Functions (SPFs) being performed. Further, we can also assist in performing a diagnostic review to evaluate the company’s readiness and preparedness in respect of TP compliance obligations and equip the group to meet the documentation deadlines and help ensure that there is alignment between the local and global documentation.

On the request of the G20 finance ministers, the Organization for Economic Co-operation and Development (“OECD”) launched an Action Plan on BEPS in July 2013. The action plan through its various reports and recommendations proposed a new set of standards to prevent BEPS and to equip governments with domestic and international instruments to prevent corporations from paying little or no taxes. India is actively involved in the BEPS project in alliance with the OECD and G20 member countries, and is keen to implement and make changes to domestic law to ensure parity with BEPS recommendations.

Based on the BEPS recommendations, an in-depth scrutiny by the tax authorities worldwide is likely on transactions involving intangibles. Tax authorities are likely to draw inference and support from OECD/BEPS guidelines in determining the return from intangibles. It is therefore essential to analyse how the various Intellectual Property Rights (IPRs), brands, etc. are positioned and whether all group members contributing towards the development, enhancement, maintenance, and the protection and exploitation of intangibles, are being remunerated appropriately. and also for determining :

• Location of IPRs vs place of conceptualisation and development of such IPRs
• Legal ownership vs beneficial ownership of intangibles and related payments. 

Three tier TP Documentation including a Country-by-Country (CbyC) reporting
One of the most important action plans pertaining to transparency is the three-tier TP documentation structure recommended by the OECD for MNEs resident in member and G20 countries.

The three-tier documentation structure:

• Applies to all MNEs whose ultimate parent is a resident of OECD/G8/G20 countries
• Requires providing an overview of the MNE’s global value chain
• Identifies if revenues and profits generated in all jurisdictions are commensurate with substance
• Detects artificial shifting of substantial amounts of income into tax-advantageous environments by an automatic exchange of information between the tax authorities
• Recognizes where groups are located in tax havens or enjoy tax incentives
• Provides transparency on the authenticity of functions, assets and risks of MNEs’ operations.

Each MNE having intercompany transactions with their group companies would be required to prepare :

• Master file to provide the MNE’s blueprint
• Local file to provide material TP positions of the local entity/taxpayer with its foreign affiliates; and  
• CbyC Report to provide jurisdiction-wise information.

OECD has released detailed implementation guidelines which India is expected to adopt. It is therefore necessary for the relevant groups/companies to realign their functions and pricing strategies to ensure that profit/income is allocated in accordance with the value creation in each jurisdiction. Companies operating in India, especially Indian headquartered companies need to tie up the functional analysis of their Indian operations vis-à-vis their global operations.

GTPS’s teams across jurisdictions can help you

• Conduct knowledge sharing sessions to increase awareness on the requirements of the three-tier TP documentation structure and identify new compliance requirements
• Perform a diagnostic review to assist you to evaluate your readiness and preparedness in respect of TP compliance obligations
• Analyse intangibles in light of BEPS guidance and determine whether all group members contributing towards the development, enhancement, maintenance, protection and exploitation of intangibles, are being remunerated appropriately
• Develop processes and procedures for compliance and equip the group to meet the documentation deadlines and ensure that there is an alignment between the local and global documentation.