The Crucial Point – ‘Appropriate use’ of CbCR information
The Action 13 of OECD’s BEPS project introduced three tiered approach to transfer pricing documentation, consisting of:
- Master File, containing Information relevant for all members of the Multinational Enterprise (‘MNE’) group
- Local file, referring specifically to material transactions of the local taxpayer
- Country by Country Report (CbCR), containing 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)
OECD’s stand on use of CbCR information
The Action 13 report (at para 56) described the underlying conditions for obtaining and use of CbCR:
- Appropriate use
Later, in September 2017, the OECD also released supplementary guidance, provided indicators of appropriate use, and discussed the instances, which shall be considered as ‘inappropriate use’ of CbCR information. The said guidelines clarified that tax authorities can use CbCR information in a) planning a tax audit or b) basis for making further enquiries.
The guidelines also discussed at length the consequences of non-compliance with the appropriate use condition and
designed a checklist, for the use of jurisdictions in order to effectively implement the appropriate use restrictions in
their domestic rules and processes.
Guidelines from Indian revenue authority Recently, the CBDT (apex Tax body in India) has released guidelines for alltax officers in India on ‘appropriate use’ of CbCR information. The said guidelines are principally a shadow reflection of OECD guidelines referred to above.
The key highlights are as below:
- Appropriate use of CbCR
In line with the OECD guidance on appropriate use, the CBDT has instructed that CbCR information shall be
used for following purposes:
- High level TP risk assessment
The Risk assessment unit i.e. CRAU may provide perspectives of potential risks from TP arrangements between Indian taxpayer and its foreign AE, which may necessitate further examination by the TPO. However, it has been clarified that enquiries by the TPO may not be restricted only to the potential risks identified by the CRAU.
- Assessment of other BEPS related risk – The OECD 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 as well as the CBDT Guidelines suggests that the CbCR information may be used to identify indicators of possible tax risks unrelated to transfer pricing. The tax officers may send enquiries during the tax assessment for further examination of such risks identified through CbCR information. However, it has been clarified that the information gathered from CbC reports cannot constitute conclusive evidence that the taxpayer is engaged in any form of BEPS.
- Inappropriate use
The use of information contained in CbC report by tax authorities shall be considered inappropriate, if:
a. The information is used as a substitute for detailed transfer pricing analysis; and
b. The information is used as the only material to propose transfer pricing adjustment
- Confidentiality of the CbCR
The CBDT instructions emphasizes that maintaining confidentiality of the information received in the form of CbCR through permissible routes is legal obligation and 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 be appropriately monitored and breach of ‘appropriate use’, if any, shall be reported to Competent Authority of India, who in turn, is committed to disclose such breaches to the Co-ordinating body secretariat of the OECD as per the OECD guidelines.
Our Principle Comments
The condition of ‘appropriate use’ of CbCR information was one of the top most expectations of MNEs from OECD and following jurisdictions, considering the sensitive nature of information involved in the CbCR.
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, MNEs 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 new litigation trend in India. Therefore, it is imperative that the MNEs prepare themselves by doing high level risk assessment of CbCR information submitted / to be submitted to the tax office.
Maulik Doshi, SKP Business Consulting, India.