Indian Transfer Pricing Safe Harbour Rules – Are they finally here?

Ozg Transfer Pricing Consultant

Ozg Center | London | New Delhi | New York | Mumbai

Back Office Phone # 0091-9811415861-72-84-92-94

Email: transfer.pricing@ozg.co.in

www.TransferPricingConsultant.com

True to his commitment of enabling a non-adversarial tax administration especially on the transfer pricing front, the Finance Minister, Mr. P. Chidambaram, in his budget speech talked of receiving the last of committee reports by 31 March 2013 post which the transfer pricing Safe Harbours can finally see the light of the day. 
The safe harbour concept was introduced in the Indian transfer pricing regulations in 2009, with an objective to provide a certain degree of certainty to taxpayers in the context of transfer pricing. However, in spite of numerous industry consultations by the Board, the safe harbours have not been prescribed till date. In the meantime, the transfer pricing disputes and the resulting adjustments in appeal at various appellate levels have spiralled India to the top three most litigious countries in the transfer pricing arena.
A ‘Safe Harbour’ refers to circumstances in which the income-tax authorities shall accept the transfer price declared by the taxpayer.  In practice, a Safe Harbour means providing guidance on activities and margins, by application of which the transfer price of the taxpayer shall be accepted by the revenue authorities, without much scrutiny. Safe Harbour Rules provides for a simple set of rules under which transfer prices are automatically accepted by revenue authorities, doing away with or significantly reducing the compliance burden and uncertainty.
A number of countries globally have prescribed safe harbours and realising the growing relevance and importance of safe harbours, the Organisation for Economic Cooperation and Development (OECD) issued draft guidance in September 2012 on various aspects regarding the formulation and implementation of safe harbours. The OECD draft guidance on safe harbours also prescribes sample Memorandum of Understanding for Competent Authorities of treaty countries to establish bilateral safe harbours for areas such as low risk manufacturing services, low risk distribution services and low risk research and development services. 
Some of the main benefits that could be associated with Safe Harbour Rules are administrative simplicity for the tax department, relief from onerous annual documentation compliance for the taxpayer and certainty in transfer pricing for the taxpayer
These are of special significance to Information Technology and Business Process Outsourcing companies Taxpayers engaged in cross border related party IT-ITES cross border services with their related parties have witnessed a spate of high pitched transfer pricing assessments consistently over the last 8 years of transfer pricing audits by the Revenue.   Considering the current level of transfer pricing litigation, the safe harbour rules are something to definitely watch out for although the nature of safe harbours is not available in the public domain they are generally expected to be around the IT-ITES sector, corporate guarantee fees, contract R&D and interest on loans.
28th February 2013 / grantthornton

Ozg Transfer Pricing Consultant

Ozg Center | London | New Delhi | New York | Mumbai

Back Office Phone # 0091-9811415861-72-84-92-94

Email: transfer.pricing@ozg.co.in

www.TransferPricingConsultant.com

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