Master file notification: Expectations, impact and risk areas for MNCs

Parikhsit DattaThe Organisation for Economic Co-operation and Development (OECD) commenced work on the Base Erosion and Profit Shifting (BEPS) project to address concerns that existing principles of domestic and international taxation were failing to keep pace with the global nature of modern business models.

As a member of the G20 and an active participant in the BEPS project, India is committed to the BEPS project outcome and implementation. Therefore, companies operating in India and Indian MNEs need to be aware of and have to constantly monitor the changes that India and other countries may bring about in their domestic laws and tax treaties.

The implementation of BEPS measures might make tax management a challenge in the initial years for multinational enterprises, tax professionals and the revenue authorities worldwide.

The OECD Action 13 proposed a three-tier documentation and recommended a standardized approach to transfer pricing (TP) documentation by countries in order to achieve the objectives of the OECD BEPS project. The three-tiered structure consists of (i) a master file containing standardized information relevant for all MNE group members, (ii) a local file referring specifically to material transactions of the local taxpayer, and (iii) a Country-by-Country (CbC) Report containing certain information relating to the global allocation of an MNE’s income and taxes paid together with certain indicators of the location of economic activity within the MNE group.

India has acknowledged its commitment to the OECD recommendations, and the requirement of a master file was mentioned in the Memorandum to the Finance Bill 2017. On 6 October 2017, the Central Board of Direct Taxes (CBDT) notified draft rules in respect of CbC reporting and furnishing of a master file. Comments and suggestions were invited from stakeholders and general public, and had to be provided before 16 October 2017. The draft rules contain Section 10DA of the Income Tax Rules, 1961 addressing the master file and Section 10DB of the Income Tax Rules, 1961 on CbC reporting.

As per the draft rules, the threshold for applicability of master file has been notified as follows:

  1. If the consolidated revenue of the international group, of which such person is a constituent entity, as reflected in the consolidated financial statement of the international group for the accounting year preceding such previous year, exceeds five hundred crore rupees; and

   2. The aggregate value of international transactions,

      (a) during the reporting year, as per the books of accounts, exceeds fifty crore rupees, or

      (b) in respect of purchase, sale, transfer, lease or use of intangible property during the reporting year, as per the books of accounts, exceeds ten crore rupees.

Constituent entity is determined by whether that subsidiary is included in the consolidated financial statement of the group under section 286 (9) (d) of the Income Tax Act, 1961.

The draft rules mention books of accounts but do not specify whether the books of accounts of the constituent entity in question or the consolidated books of accounts of the international group would need to be tested.

If an international group has more than one constituent entity in India, the international group could designate one of the constituent entities resident in India for furnishing the master file, by filing a notification in form 3CEBE. Form 3CEBE is currently drafted in a manner that makes its applicable only to a constituent entity (resident in India) of a non-resident international group.

It is pertinent to highlight that Action 13 of the OECD BEPS project does not prescribe any threshold for the preparation of the master file. Countries such as Austria, Belgium, China, Colombia, Denmark, Finland, Germany, Indonesia, Liechtenstein, Mexico, Netherlands, Poland, South Korea, Spain, Sweden and Vietnam have already notified a master file threshold that is substantially lower than the CbC reporting threshold.

As per Action 13, taxpayers need to include the following information in the master file: information on operating entities, supply chain, overall strategy for IPs, description on group financing, general TP policies for financing arrangements, details of rulings/advance pricing agreements and information on the global TP policies etc.

The Indian tax administration has considered the above guidance and the draft rules are largely in line with the contents as prescribed under the Action 13 report. The draft rules, however, require the following additional key information.

  • Maintenance of a list of all the operating entities of the international group along with their addresses. This information does not form part of the Action 13 report
  • A description of the functions performed, assets employed and risks assumed by the constituent entities of the international group that contribute at least 10% of the revenues, assets and profits of the group. The Action 13 report requires a brief written functional analysis describing the principal contributions to value creation by individual entities within the group
  • A list of all the entities of the international group engaged in the development and management of intangibles along with their addresses. The Action 13 report requires a general description of the location of principal R&D facilities and location of R&D management
  • A detailed description of the financing arrangements of the international group, including the names and addresses of the top 10 unrelated lenders. The Action 13 report requires a general prescription of group financing activities, including financing arrangements with unrelated lenders

The draft rules require a “detailed description” instead of a “general description” mentioned in the Action 13 report, particularly with regard to TP policies relating to research and development, IP and financing arrangements.

Tax authorities may use the information contained in the master file to identify high-risk companies and transactions for undertaking detailed assessment proceedings. The extent of information available due to the master file is expected to provide tax authorities with a greater level of understanding of the operations of an MNC group. Consequently, subsidiary companies of MNC groups may be exposed to a more focused scrutiny based on the identified risk areas, as per the regulators.

One might also have to wait and watch to see how the master file information would be used by the tax authorities during assessment proceedings of the subsidiaries of foreign MNCs in India.

There are subsidiaries of many foreign-headquartered companies that have a presence in India. In case the group has a presence in other countries such as the US, the UK, Brazil, Italy, Malaysia, Norway, Portugal, Singapore, South Africa and Switzerland where a master file is not required as per the existing regulations of those countries, the master file would need to be prepared for India.

Many MNCs have raised concerns relating to the privacy and confidentiality of the master file. Hopefully, rules requiring online filing of the master file would address these concerns.

By Parikshit Datta and Banashwar Ghosh

Parikshit is a Partner, International Tax Services, EY India

Banashwar is a Senior Manager in the Transfer Pricing Team, EY India


This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

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