Executive summary

The Indian Government, through Finance Act, 2016, amended the Indian income tax law (ITL) to introduce provisions for additional transfer pricing (TP) documentation, consisting of: (i) a master file containing standardized information relevant for all members of a multinational group; and (ii) a Country-by-Country (CbC) report 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). The amendments were introduced to implement the recommendations contained in the Organisation for Economic Co-operation and Development's (OECD's) Base Erosion and Profit Shifting (BEPS) report on Action 13 (Transfer Pricing Documentation and Country-by-Country Reporting). Further, rules for implementation were issued on 31 October 2017. The ability of a jurisdiction to obtain and use CbC reports is conditional upon it using CbCR information appropriately. Accordingly, India being committed to ensuring the appropriate use of CbC reports, on 27 June 2018, released Instruction No. 02/2018 (the Guidance) to provide guidance on the appropriate use of CbC reports. The Guidance also addresses concerns around confidentiality of CbCR information as well as outlines a process for monitoring, control and review of appropriate use.

The Guidance is largely based on the Action 13 report and the OECD guidance of September 2017 on appropriate use which provides that the information contained in a CbC report can be used only for high level TP-risk assessment, the assessment of other BEPS-related risks, and, where appropriate, for economic and statistical analysis. The information cannot, under the minimum standard, be used as a substitute for a detailed TP analysis of individual transactions and prices based on a complete functional analysis and comparability analysis. The Guidance also reiterates the OECD position that in case India makes an adjustment to the income of any taxpayer in contravention of these conditions, it requires India to promptly concede such adjustment in any competent authority (CA) proceedings. This does not imply, however, that India would be prevented from using a CbC report as a basis for making further inquiries into the TP arrangements within a multinational enterprise (MNE) group or into other tax matters in the course of a tax audit. The Guidance also sets out confidentiality norms to be followed by the tax officials while using CbCR information. Further, as per the Guidance, a quarterly review process for appropriate use of a CbC report will be undertaken by the Indian Tax Administration through the Indian CA, which is set to start from 1 January 2019 with a first deadline of 30 April 2019 in respect of the first quarter.

This Alert provides an overview of the Guidance with respect to the appropriate use of CbCR information.

Detailed discussion

Overview

On 5 October 2015, the OECD released its final report on Action 13, Transfer Pricing Documentation and Country-by-Country Reporting, under its BEPS Action Plan. The report introduced a standardized three-tiered approach to TP documentation for MNEs consisting of a master file, a local file, and an obligation on certain MNE groups to annually file a CbC report. CbCR was one of the four minimum standards of the BEPS project to which all members of the BEPS inclusive framework had committed to consistently implement. To assist and support the consistent and swift implementation of CbCR, the OECD released Guidance on appropriate use of information contained in CbC reports as well as two handbooks, as part of the suite of guidance prepared by the OECD and the BEPS inclusive framework to assist in the implementation and operation of CbCR.

In response to the OECD's BEPS project recommendation, the Indian Government, through Finance Act, 2016, amended the ITL to introduce provisions for additional TP documentation and CbCR to implement the guidance contained in Action 13. Detailed rules for implementation were also released on 31 October 2017 on CbCR and furnishing of the master file. Under the ITL, while the master file and local file would be filed the by MNEs locally, the local CbC report filing requirements would arise in a case: (i) where the parent entity of an MNE or the alternate reporting entity (ARE) is resident in India; or (ii) where the home jurisdiction of the MNE group to which the Indian constituent entity is affiliated, neither has an arrangement¹ for exchange of the CbCR with India nor is exchanging information with India even though there is an agreement and this fact has been communicated to the constituent entity by the Indian Tax Administration. In all other cases, every constituent entity resident in India should file a CbCR notification in India given that the CbC reports would be filed in the jurisdiction of tax residence of the ultimate parent entity and shared between jurisdictions through the automatic exchange of CbCR information pursuant to government-to-government mechanisms under the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, bilateral tax treaties or Tax Information Exchange Agreements (TIEAs).

Since the implementation of the CbCR regulations in India, there has been ongoing and increasing activity around CbCR as well as concerns around the use of CbCR information. Accordingly, India, committed to ensuring appropriate use of the CbC reports, released, on 27 June 2018, Instruction No. 02/2018 - the Guidance - which primarily contains processes and mechanisms of CbC reports so as to ensure adequate reference and adherence in relation to the appropriate use of CbC reports.

Contents of the Guidance

Manner of exchange of CbC reports

As a BEPS Inclusive Framework member, India signed, in May 2016, the Multilateral Competent Authority Agreement (MCAA) for the automatic exchange of CbC reports. Further, India would separately enter into bilateral competent authority agreements (BCAA) for the automatic exchange of CbC reports either based on the existing bilateral tax treaties or the TIEAs where other jurisdictions have not signed/ratified the CbCR MCAA. Based on the MCAA or the relevant BCAAs, India will exchange CbC reports filed by a parent entity of an MNE group or an ARE resident in India for financial years starting from 1 April 2016 and will also receive CbC reports of nonresident MNE groups who have constituent entities in India.

Access to the CbC reports

The Guidance states that all the CbC reports filed in India as well as received by India from other jurisdictions would primarily be accessed by the Indian CA and the Director General of Risk Assessment (DGRA). Further, once the case of a constituent entity is selected for audit, the jurisdictional Transfer Pricing Officer (TPO) will have access to the CbCR information of that constituent entity. However, the TPO ought to follow the standard operating procedure in this regard, which would be formulated by the Centralized Risk Assessment Unit (CRAU) i.e., part of DGRA.

Appropriate use of the CbC reports

As per the Guidance, the information obtained by TPOs through the CbC reports shall be used appropriately for broadly three purposes in line with the Action 13 report as follows: (i) high level TP risk assessment; (ii) assessment of other BEPS-related risks; and (iii) economic and statistical analysis. Further, it is provided that the CbCR information may be used for planning a tax audit; and as the basis for making further inquiries into the MNE group's TP arrangements and tax matters during the course of an audit. However, the use of CbCR information shall be considered "inappropriate" if: (i) such information is used as a substitute for a detailed TP analysis and determination of arm's-length price based on a detailed functions, asset and risks analysis and comparability analysis; and (ii) the information is used as the only source to propose a TP adjustment.

• High level TP risk assessment

As per the Guidance, the CRAU shall first evaluate the CbC reports (both filed and received) which could provide some perspectives on the potential risks arising from the TP arrangements between the Indian constituent entity and its affiliates. This may require further examination which could be planned through selection of that particular constituent entity for audit in respect of the relevant financial year. During the course of the audit, the TPO shall make further inquiries using the CbCR information including any other data source which are made available to him during the course of audit. Further, there is no restriction on the TPO's scope that these inquiries should only be limited to the potential risks identified by the CRAU. In line with the Action 13 report, the Guidance clarifies that the information contained in CbC report shall not be used as the only source to propose TP adjustments. The TP adjustments shall be made as per the provisions of ITL and rules thereto.

In line with the Action 13 report, the Guidance states that the CbC reports may be used to identify indicators of possible tax risks which are unrelated to TP arrangements; which will lead to examination of such risks through further inquiries during audit so as to arrive at a conclusion on potential BEPS issues. However, the information gathered from CbC reports cannot be considered as "conclusive evidence" to arrive at the decision that MNE group is engaged in other forms of BEPS.

As specified in Action 13, the CbCR information may be used for economic and statistical analysis for the purpose of better understanding of the use of CbC reports as well as to identify the features, benefits and risks of the CbC reports and tax systems. Further, the usage of information for such analysis shall be consistent with the provisions of the tax treaties.

Confidentiality of the CbC reports

The Guidance recognizes the legal importance and necessity of maintaining confidentiality under tax treaties and also as an international obligation since any breach could impact India's ability to receive CbC reports from other jurisdictions. Therefore, the Guidance provides that all CbC reports, which are filed in India and received from other jurisdictions, are subject to strict confidentiality norms under the provisions of ITL and tax treaties respectively. The Guidance also makes it clear that all officers who are handling the CbCR information exchanged under the tax treaties, must adhere to the confidentially chapter of "Manual on Exchange of Information" as issued by the Government of India. The Guidance also places greater onus on the senior officials within the Tax Administration to sensitize the officers in their region on the requirements of maintaining confidentiality.

Monitoring, control and review

As per the Guidance, the use of CbCR information by the TPO during TP audits will be monitored by the jurisdictional Commissioner and any breach of appropriate use may be brought to the notice of the Indian CA through proper channels. The Indian CA is committed to disclose such breaches of appropriate use to the Coordinating Body Secretariat of the OECD. Further, it is provided that the respective TPOs shall also report to the jurisdictional Commissioner any concerns raised by the Taxpayers on breach of appropriate use and if the Commissioner does not resolve the issue, the same should immediately be brought to the notice of the Indian CA. In line with Action 13 standard, the Guidance reiterates that if any adjustments to the income of Taxpayer are based on inappropriate use of CbC report information, the Indian CA is committed to promptly concede such adjustment in any mutual agreement procedure proceedings.

Further, a quarterly review mechanism on appropriate use of the CbC reports would be undertaken by the Indian Tax Administration through the Indian CA. Such quarterly review reports from all concerned tax officials should reach the Indian Tax Administration within 30 days from the end of each quarter. The first of such quarterly review is scheduled for the quarter January-March 2019 and is due by 30 April 2019.

Implications

The Guidance issued by the Indian Tax Administration is largely in line with the guidance issued by the OECD on the matter. With India expressing its commitment to the appropriate use of CbC reports, the Guidance should now facilitate the exchange of CbC reports with India through the CA Agreements. The Guidance provides useful insights into how the tax authorities would use CbC reports for risk assessment purposes and what are the consequences of inappropriate use. With ongoing and increasing activity around CbCR, it is expected that the Guidance will not remain a static tool, but will be updated periodically to ensure that tax authorities can benefit from their experience. In this regard, taxpayers should continue to closely monitor as to how their CbC report would be used by the tax authorities for risk assessment and consider appropriate remediation measures to mitigate risks.

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ENDNOTE

¹ Competent authority agreement for exchange of CbC reports based on existing international agreements such as the Multilateral Convention on Mutual Administrative Assistance in Tax Matters, bilateral tax treaties and Tax Information Exchange Agreements.

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CONTACTS

For additional information with respect to this Alert, please contact the following:

Ernst & Young LLP (India), Hyderabad

• Jayesh Sanghvi, National International Tax Services Leader
  jayesh.sanghvi@in.ey.com

Ernst & Young LLP (India), New Delhi

• Vijay Iyer, National Transfer Pricing Leader
  vijay.iyer@in.ey.com

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ATTACHMENT

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