The OECD (Organization for Economic Co-operation and Development), in 2013, set off on a new journey to redesign international tax rules. It developed an action plan to help countries prevent base erosion and profit shifting (BEPS) and ensure that multinational corporations pay tax where they undertake economic activities and earn profits.
BEPS soon became the buzzword in the international tax fraternity with more and more countries lending their support to the project. The OECD last week informed the G20 nations that countries have already begun to implement the BEPS proposals and that the project has now become a reality.
The BEPS Action Plan includes many interesting proposals but the proposed country-by-country reporting requirement (Action 13) for MNCs has largely stolen the project’s thunder. There are compelling reasons for this usurpation.
The reporting requirement is targeted at large groups with an aggregate turnover of more than Euros 750 million; it requires these groups to mandatorily file a country-wise report setting out key information about the group that would otherwise not be accessible to tax authorities worldwide. Finally, the report filed may be automatically exchanged between tax jurisdictions, leading to a risk of mishandling of confidential company information.
On February 29, 2016, India joined the list featuring several other countries that have either implemented, or have taken appropriate steps to implement, the reporting requirements proposed under Action 13.
The finance minister, while delivering this year’s budget, told the Parliament that the new reporting requirement would be inserted by way of an amendment to the Income Tax Act and would apply from April, 2017. The minister stressed that the decision to implement Action 13 was taken to meet India’s commitment to the OECD’s BEPS initiative.
India is participating in the BEPS project as an “associate” and has made explicit on numerous occasions its commitment to implement the BEPS proposals (with the exception of binding, mandatory tax arbitration). Therefore, implementing Action 13 in India was never a question of if or should, but when and to what extent.
But the haste with which the government has proceeded to implement Action 13 is a recipe for compromised security of sensitive commercial information. Implementing legislative changes of such magnitude demands an extensive public consultation, but the government has skipped this process and as a result has come up with a draft rule that is void of industry opinion.
A CbC (country-by-country) report would contain key information about a MNC’s operations in respect of each country in which it does business in. The draft regulations also empower the tax authority to call for any such information or document as it thinks fit. But the draft rule does not take into account the question of confidentiality of company data.
The exchange of sensitive commercial data with foreign tax jurisdictions when there is a scant need to do so would heavily jeopardise Indian companies. The draft rule does not set out any conditions that foreign tax authorities have to satisfy before they can request exchange of reports, nor does it stipulate mechanisms to prevent foreign tax authorities from engaging in fishing expeditions to get access to the reports. The draft rule is also silent on how to deal with foreign jurisdictions who publicly disclose information contained in the reports, or otherwise abuse the reports so exchanged.
India should consider deferring the CbC reporting requirement until suitable amendments are introduced in the Income Tax Act, which not only protect confidentiality of information but also stipulate mechanisms to limit abuse by foreign tax jurisdictions.
Before honouring exchange requests coming from foreign jurisdictions, India must ensure that such jurisdictions have stringent domestic laws to safeguard taxpayer information.
Ashish Goel is a LLM in International Tax Law from King’s College London