On 27 June 2018, the central board of direct taxes (CBDT) released Instruction No. 02/2018 to provide guidance on the appropriate use of CbC (Country-by-Country reports) reports.
In 2015, the Organization for Economic Co-operation and Development (OECD) and G20 countries adopted an action plan to address base erosion and profit shifting (BEPS), and this plan includes three-tiered transfer pricing documentation standards—CbC reports, Master file, and Local file—under BEPS Action 13. Implementation of CbC reporting, thus, is one of the standards within the BEPS action plan required to be implemented by all jurisdictions that are members of OECD Inclusive Framework on BEPS, including India.
The guidance explicitly lists following two circumstances when the use of CbC reports will be considered to be inappropriate:
(1) if the information is used as a substitute for a detailed transfer pricing analysis of international transactions and determination of an arm’s length price based on a detailed functional and comparability analysis; and
(2) if the information is used as the only evidence to propose a transfer pricing adjustment.
The Guidance also addresses concerns around confidentiality of CbCR information as well as outlines a process for monitoring, control and review of appropriate use.
