Union Budget 2016 – Key Transfer Pricing proposals

The Hon'ble Finance Minister of India presented the third Budget of the Modi Government on 29 February 2016. In the backdrop of significant global slowdown and a need to jumpstart the economy, the Finance Minister's job was to strike an intricate balance between growth, fiscal consolidation and the promise to provide ease of business coupled with a non-adversarial tax regime.

In the recent past, transfer pricing has been a much debated topic in corporate board rooms as well as Government ministries worldwide. The OECDalongwith the G20 and certain other countries have issued the Base Erosion and Profit Shifting (BEPS) Guideline in October 2015 emphasizing on the need to focus on conduct and substance rather than contract and legal form in tax determination. Pricing of intra-group transactions is also a potential trigger for BEPS and expectedly found a crucial place in the OECD BEPS Guidelines.

One of the key measures under the BEPS Guidelines in the course of determining the conduct and substance is the documentation requirement for intra-group transactions. The documentation should not only evidence the Functions carried out by the transacting entities, Assets employed and the Risks undertaken but also should provide a bird's eye view of the entire supply chain of the group worldwide. Specific requirement relating to furnishing and maintaining of a Master File and Country-by-Country (Cubic) Report by the Group's Ultimate Parent has been provided in the BEPS Guidelines to the above effect.

A Master File provides a broad overview of the entire group's functioning, including the business, details relating to intangibles and the group's operating structure. A Cubic report is a document capturing a snapshot of the financial position and certain other relevant characteristics for various group entities at each country level. This would provide tax authorities a holistic perspective of the group's activities and profitability at each country level.

As mentioned above, India was a part of the OECD BEPS discussion and is a signatory to the BEPS report. In various interactions with the Government officials in the recent past, the Government reiterated its commitment to adopt the aforesaid BEPS Guidelines in the Indian domestic legislation including the TP documentation requirement.

Given above, the Finance Minister announced the introduction of the aforesaid documentation guidelines within the Indian domestic tax legislation as a part of the Budget 2016. The Finance Act introduces detailed provisions relating to maintaining and furnishing of the Master File and the Cubic report. The ensuing paragraphs discuss the aforesaid amendment in detail.

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