India: Indian Revenue Guidelines On ‘Appropriate Use' Of CbCR Information

Last Updated: 26 July 2018
Article by SKP  

The Action 13 report of the Organisation for Economic Co-operation and Development's (OECD's) Base Erosion and Profit Shifting (BEPS) project introduced to transfer pricing documentation, consisting of:

  1. Master File, containing information relevant for all members of the Multinational Enterprise (MNE) group;
  2. Local file, referring specifically to material transactions of the local taxpayer; and
  3. Country-by-Country Reporting (CbCR), containing certain information relating to the global allocation of the group's income and taxes, together with indicators of the location of economic activity within the group (CbCR information).

Applicability of CbCR:

In India, CbCR filings have been made applicable from Financial Year 2016-17 (April 2016 to March 2017) subject to meeting the consolidated revenue threshold criteria of INR 5 billion. For further details on applicability refer our alert click here.

In this regard, recently, the outcomes of the peer review process were also shared by the OECD which had following key recommendation for India on the CbCR front:

  1. The threshold of INR 5 billion under the Indian law may be reviewed to prevent hardship on overseas headquartered entities which are otherwise not required to prepare CbCR (since threshold of EUR 750 million is not met), however, they cross the threshold of INR 5 billion prescribed in Indian law when converted using the exchange rate prescribed under the Indian law.
  2. Presently, the Indian CbCR template (Form 3CEAD) mentions that the term 'related party' referred to in the said template shall mean 'Associated Enterprises' (AE) as defined in the Indian Income Tax Act, 1961 (the Act). The term AE has a very wide meaning and covers parties whose financial statements are not consolidated into the Ultimate Parent Entity (UPE) of the group. Therefore, to avoid such mismatch, the peer review report recommends 'related party' shall have the same meaning as 'constituent entity.'

To date, around 60 jurisdictions have introduced or taken steps to introduce an obligation for MNEs to file CbCR, according to the OECD, while more than 1,400 exchange relationships between pairs of jurisdictions have been created.

OECD on the appropriate use of CbCR information

The Action 13 report (at para 56) describes following as underlying conditions for obtaining and use of CbCR:

  • Confidentiality;
  • Consistency; and
  • Appropriate use.

Later, in September 2017, the OECD also released supplementary guidance on the 'appropriate use' of CbCR information by the tax authorities. These guidelines provided indicators of appropriate use and also discussed the instances which will as 'inappropriate use' of CbCR information. The said guidelines clarified that tax authorities can use CbCR information planning a tax as a for making further .

The guidelines also discussed at length the consequences of non-compliance with the appropriate use condition and designed the checklist which may be used by the jurisdictions to effectively implement the appropriate use restrictions their domestic rules and processes.

Guidelines from Indian revenue on 'appropriate use' of CbCR information

Recently, the Central Board of Direct Taxes (CBDT) (apex tax body in India) has released guidelines (Instructions No. 2/2018) for all tax officers in India on 'appropriate use' of CbCR information. The said guidelines are mostly a shadow reflection of OECD guidelines referred to above. The key highlights of the said guidelines are summarized below:

  • Access to CbCR
    As regards, the CbCR filings in India, Rule 10DB (3) of Indian Income Tax Rules, 1962 (the Rules) states that the relevant Indian taxpayer shall furnish the CbCR in a prescribed form to Director General of Income Tax - Risk Assessment (DGRA). Furthermore, the CBDT guideline has clarified that all CbCR's exchanged by other jurisdictions shall be primarily accessed by Competent Authority of India. Furthermore, the CBDT has instructed that the Centralized Risk Assessment Unit (CRAU) of the DGRA will formulate a standard operating procedure for use by the filed level Transfer Pricing Officers (TPO) in this regard.
  • Appropriate use of CbCR
    In line with the OECD guidance on appropriate use, the CBDT has instructed that CbCR information shall be used for the following purposes:

    • High-level transfer pricing risk assessment – the risk assessment unit, i.e. CRAU, may provide perspectives of potential risks from transfer pricing arrangements between the Indian taxpayer and its foreign AE, which may necessitate a further examination by the TPO. However, it has been clarified that inquiries by the TPO may not be restricted only to the potential risks identified by the CRAU.
    • Assessment of other BEPS related risk – The Action 13 report and the CBDT guidelines does not contain specific guidance with respect to the ability of the tax authorities to use information in CbCR for assessing other BEPS related risks.
      However, the September 2017 guidance of the OECD on 'appropriate use' suggests that 'assessment of other BEPS related risks' should be understood to refer to the assessment of tax risks that may result in the erosion of a country's tax base. The CBDT guidelines that CbCR may be used to identify indicators of possible tax risks unrelated to transfer pricing. The tax officers may send during the tax assessment for further examination of such risks identified through CbCR information. However, it has that the information gathered from CbC reports cannot constitute conclusive evidence that the taxpayer is engaged in any form of BEPS.
    • Economic and statistical analysis – The CBDT guidelines suggests that the economic and statistical analysis of CbCR information will assist in better understanding of the use of CbCR and also to identify features, benefits, and risks of the CbCR and tax systems.
  • Inappropriate use
    The CBDT guidelines have instructed that the use of information contained in CbC report by tax authorities shall be considered inappropriate, if:

    • The information is used as a substitute for detailed transfer pricing analysis; and
    • The information is used as the only material to propose transfer pricing adjustment.
  • Confidentiality of the CbCR
    The CBDT instructions emphasize that maintaining confidentiality of the information received in the form of CbCR through permissible routes is a legal obligation and therefore the guidelines on maintaining confidentiality shall be strictly followed by all the officers.
  • Monitoring, Control and Review
    The CBDT has instructed that the use of information in transfer pricing audits shall and breach of 'appropriate use', if any, shall be reported to a Competent Authority of India, who in turn is committed to such breaches to the ordinating body secretariat of the OECD as per the OECD guidelines. The concerns of the taxpayers on inappropriate use will have to be addressed by the jurisdictional tax officers, failing which the Competent Authority will assume the responsibility. The CBDT has also suggested internal quarterly reporting by the tax authorities to monitor the appropriate use of CbCR information.

SKP's comments

One topic that has been dominating almost all discussions on the subject of transfer pricing is the 'appropriate use' of CbCR)/Master File, especially after the first round of filings in India, which were recently concluded.

The condition of 'appropriate use' of CbCR information was described very clearly in the Action 13 report of the BEPS project itself, to which India is a participating nation. Thereafter, the supplementary guidance in September 2017 specifically reminded the participating jurisdictions of the consequences of non-compliance with appropriate use condition.

Therefore, one may say that the CBDT instructions on 'appropriate use of CbCR information' in response to OECD guidelines is inevitable. The implementation of these guidelines by the filed level tax officers will be a key factor in strengthening the confidence of MNE's.

While the CBDT guidelines are a welcome move, it is pertinent to note that the CbCR information will provide tax authorities for the first time with a full breakdown of MNE's revenue, profits, tax and other attributes by tax jurisdiction, significantly increasing the volume and scope of information available to them. Therefore, the taxpayers can anticipate that with access to the CbCR information the transfer pricing assessments in India are likely to be more intense, and it may potentially create a new litigation trend in India. Therefore, it is imperative that the taxpayers prepare themselves by doing a high-level risk assessment of CbCR information submitted/to be submitted to the tax office.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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