Safe-harbour margins may be cut to draw MNCs

Ambit of transfer pricing provisions likely to be expanded

The government might streamline safe-harbour rules by October to determine the tax liability of multinational companies (MNCs), to reverse a trend of tepid responses to the transfer pricing provisions introduced three years ago.

The margins under these rules might be reduced from 20-30 per cent and the ambit expanded to attract more MNCs to settle their tax liabilities and invest more in India.

Safe-harbour rules are a kind of transfer pricing provisions to give multinational companies margins on which taxes will be imposed. The other method is advance pricing agreements (APAs). While margins are given in safe-harbour rules, these are mutually decided by the companies and tax authorities under APAs. So, companies know in advance their margins on which tax will be imposed under both provisions.

A committee comprising senior revenue department officials — which has re-looked at the margins, definition of safe-harbour rules and coverage of sectors — is expected to submit its report by the month-end.

“We have taken into consideration the demands of industry and tried to address all concerns,” said a government official. “They found the margins on the higher side. We have also taken a re-look at the definition of safe-harbour to remove ambiguity. Thirdly, we have looked at the sectors that we need to add to expand the scope of safe-harbour.”

India announced safe-harbour rules in 2013, but the high margins of up to 30 per cent on operational profits made these unattractive for companies.

Safe-harbour rules are essentially directives on margins the tax authorities should accept for the transfer price declared by an assessee.

For instance, information technology and information technology-enabled companies with transactions of up to Rs 500 crore have a safe-harbour operating margin of 20 per cent and those with transactions above Rs 500 crore have a safe-harbour margin of 22 per cent. Knowledge process outsourcing companies have a safe-harbour operating margin of 25 per cent.

Contract research and development services, wholly or partly related to software development, have a margin of 30 per cent or more. “By October, we should have the revised rules as that’s the time most companies do tax planning,” said the official.

Experts said the margins decided in tribunals or in APAs are lower, ranging between 15 and 18 per cent. Lowering the rates will encourage companies to know their tax liabilities in advance.

Neeru Ahuja, partner, Deloitte Haskins & Sells LLP, said, “Who is going to have 20-30 per cent margins these days?” Safe-harbours with reduced margins would be more preferred than even APAs as the former option was cheaper in terms of processes.

In APAs, one has to come to mutually settled margins after negotiations with tax officials. However, lower margins make APAs the preferred choice for multinational companies.

The government introduced APAs in 2012. More than 500 applications are pending.

Officials said the ambit of safe-harbours could also be expanded.

Ahuja said marketing and sales subsidiaries of multinational companies do not come under these rules. Besides, all shared service centres of MNCs might be brought under the ambit of these rules. Also, there is ambiguity in the definition of IT, ITeS and knowledge process outsourcing companies with a lot of overlap, which could be corrected.

India has the highest cases of transfer pricing litigation. The number of cases scrutinised has quadrupled from 1,061 in 2005-06 to 4,290 in 2014-15. Last year, the government said an officer would be assigned not more than 50 important and complex transfer pricing cases. Officers typically audit more than 70 cases at a time. Besides, the tax department had incorporated range and multi-year data in transfer pricing calculations to bring Indian laws in line with international practices. Earlier, single-year data and the arithmetic mean were used to arrive at transfer pricing.