India tax authority releases welcome guidance on appropriate use of country-by-country reports

By Suchint Majmudar, Hussain Sunel, & Praneeth Narahari, Deloitte Touche Tohmatsu India LL

India’s Central Board of Direct Tax (CBDT) on 27 June 2018 issued guidance on how and for what purposes the country-by-country reports of multinationals will be used in India.

This instruction [instruction no. 2/2018] provides clarity on fundamental aspects of country-by-country reporting, such as access, appropriate use, and confidentiality of the information submitted in country-by-country report.

This is significant, as India is one of the first countries to release such detailed guidance. The instructions issued by CBDT are binding on revenue but not on taxpayers, and are open to judicial scrutiny.

Overall, this is an extremely positive move on the part of the Indian revenue authorities.

Background

One of the consequences of the OCED/G20 base erosion and profit shifting (BEPS) actions is to require multinational companies with revenue of US$ 850 million or more (or equivalent) to file a country-by-country report with tax authorities.

The country-by-country report is a jurisdiction-wise summarised annual report card of the multinational, providing world-on-a-page information on the revenue, profit, capital, income tax, number of employees, and nature of the business carried on in each jurisdiction in which the multinational operates.

With the requirement being imposed on multinationals to disclose such detailed information, there have been significant concerns on how the reported information would be used by governments and,  more importantly, worries about whether the confidentiality of the information would be maintained by the government.

For many multinationals, this information can be extremely sensitive as it could reveal their value chain, operational structures, and sources of competitive advantage, which could be of strategic importance in the market.

India, among other countries, has implemented many of the BEPS actions, including Action 1 (equalisation levy), Action 4 (interest limitation), Action 7 (PE), Actions 8 to 10 (transfer pricing), Action 13 (3-tier transfer pricing documentation), Action 14 (dispute resolution) and Action 15 (multilateral instrument).

India has signed the Multilateral Competent Authority Agreement (MCAA) for automatic exchange of country-by-country reports (among some 72 countries including the UK, Singapore, Japan, and China) whereby India will exchange and receive country-by-country reports from other countries.

For countries that have not signed and ratified the MCAA, for example, USA and Taiwan, it is likely that India will exchange the country-by-country reports through bilateral competent authority agreements using tax information exchange agreements or will require the local subsidiary of the multinational to file the country-by-country report with India.

Consequently, Indian tax authorities would soon have access to country-by-country reports filed in other jurisdictions. 

 Access to country-by-county report

The new instruction clarifies that reports filed in India as well as exchanged by India from other countries will be primarily accessed by high-level authorities first i.e., the Indian competent authority and Director General of Income-tax (Risk Assessment) (DGRA).

The DGRA is a new directorate intended to serve as the repository and processor of the country-by-country reports as a risk assessment tool. The country-by-country reports will be used for the purpose of BEPS risk assessment by the tax authorities centrally.

Based on the risk assessment, if a multinational is identified by Revenue for audit, the information submitted in the country-by-country report relating to that multinational will be made available to the field transfer pricing officer who would be undertaking a detailed audit.

Another unit has been set up under the aegis of the DGRA, called the Centralised Risk Assessment Unit (CRAU), which, among other tasks entrusted to it, will formulate the standard operating procedure for Indian transfer pricing officers using the country-by-country information.

Appropriate use

The new instruction provides guidance on the appropriate use of country-by-country reports consistent with OECD guidance.

As per the instruction, the country-by-country report information will be primarily used for three purposes, namely, high-level transfer pricing risk assessment; assessment of other BEPS-related issues that may have resulted in shifting of profits due to inappropriate practices; and statistical information.

Therefore, the instruction impliedly clarifies that the use of the country-by-country report is not restricted to transfer pricing risk assessment alone.

The instruction states, however, that while the country-by-country report will be used by transfer pricing officers in undertaking and planning a tax audit, the information should not be used as a substitute for a detailed transfer pricing audit nor should it be the only material for proposing a transfer pricing adjustment.

This assertion should provide much-desired confidence to multinationals concerned about the inappropriate use of, or sole reliance on, country-by-country report information.

Confidentiality

The instruction also clarifies that country-by-country reports will be subject to the requirements of confidentiality under tax treaties or provisions of the Income Tax Act, 1961 (Act). 

It also states that the detailed guidelines on maintaining confidentiality provided in Chapter- VII of the Manual on Exchange of Information, which is the international standard set by the OECD, should be strictly adhered to by the tax officers who handle information contained in country-by-country report.

Should there be a breach of confidentiality, the instruction states that the Indian tax administration must give up the adjustment – this is a notable assertion that places a great deal of onus on Revenue to maintain confidentiality at all costs.

Confidentiality of transfer pricing information is not new to India – in particular, information in advance pricing agreements has been kept confidential by the Revenue authorities.

Monitoring, control, & review

The instruction also assures that the use of information by transfer pricing officers shall be monitored by the Commissioner of Income-tax (Transfer Pricing) (CIT-TP) and periodically reviewed by the Indian competent authority.

In case of any breach or in a scenario where any adjustments are made to income of taxpayer based on inappropriate use of the country-by-country report information, the instruction provides that taxpayers should notify the CIT-TP, and, if the matter is not is resolved, the Competent Authority of India, who will in turn report the breach to OECD’s Coordinating Body Secretariat, if required.  

This is important given the ability of competent authorities of other jurisdictions to temporarily suspend exchange of country-by-country reports in case of non-compliance with the appropriate use condition.

While these are early days, a question does come up as to how the country-by-country reporting information will be dealt with in forums such as Income Tax Appellate Tribunals (Tribunal) because the proceedings are quasi-judicial and the orders of the Tribunal are published in the public domain.

Exchange of country-by-country reports

The CBDT has clarified that it will endeavour to enter into a bilateral competent authority agreements with countries that have not signed or ratified the MCAA to permit exchange country-by-country reports.

Consequently, Indian tax authorities will soon have access to country-by-country reports filed in many other tax jurisdictions that are currently not part of the MCAA framework. This would also relieve foreign multinationals with entities in India from the requirement to locally file the country-by-country report in India.

Take away points

The new guidance is a welcome move by India as most multinationals had concerns about the possibility of inappropriate use and confidentiality of information furnished in country-by-country reports.

This instruction will subdue multinationals’ fears by ensuring that the tax authorities having access to country-by-country report information will maintain confidentiality with appropriate monitoring mechanisms.

The instruction also makes it clear that the tax authorities have a framework for use of country-country information (and likely the information in the master file) for the purpose of undertaking audits and risk assessments.

By virtue of these recent developments, Indian transfer pricing audits and disputes arising therefrom are likely to get more focused and intensive. They will now entail a 2-stage process – a risk assessment that would extend to analysis of the country-by-country report and transfer pricing audit.

Though the instruction broadly addresses taxpayers concerns, clarification is needed on critical aspects, such as the parameters for the risk-based assessment subsequent to which the country-by-country report information would be shared with the jurisdictional transfer pricing officers; the time limit for resolving the concerns raised by the taxpayers on a breach of appropriate use conditions; and the procedure to be followed by the Indian competent authority in a mutual agreement procedure proceedings for the adjustments made by the tax authorities based on inappropriate use of the country-by-country report information.

It would be interesting to watch how these instructions are practically implemented and enforced by the Indian tax authorities.

It would be prudent for multinationals to ensure compliance in India with BEPS (i.e., filing all the relevant forms in India relating to three-tiered documentation). This is considering that non-compliance in itself could be viewed negatively by the tax authorities. The tax audit report has also been modified recently to capture the filing information of country-by-country reporting.

As it is clarified that the country-by-country report information will be used for auditing both transfer pricing and other tax matters, it will be essential to review the information provided in the country-b-country report from a potential risk perspective and from the standpoint of providing planning opportunities to improve upon the substance of transactions.

Further, it would be pertinent to ensure that the information disclosed in the country-by-country report, master file and local file adequately factors a 360-degree view and supports the transfer pricing and other tax positions of the multinational group and also demonstrates the compliance of the multinational group with Indian and other countries transfer pricing regulations.

–Suchint Majmudar, Partner, Deloitte Touche Tohmatsu India LLP. He can be reached at [email protected] / +91 98868 51453

-Hussain Sunel, Manager, Deloitte Touche Tohmatsu India LLP. He can be reached at [email protected] / +91 91760 78026

-Praneeth Narahari, Assistant Manager, Deloitte Touche Tohmatsu India LLP. He can be reached at [email protected] / + 91 94919 33365