India rationalises 'safe harbour' rates for MNCs

In a move to reduce transfer pricing disputes, the Indian government on Thursday rationalised 'safe harbour' rates so as to induce more foreign companies to make use of this mechanism and reduce transfer pricing disputes.

"In order to reduce transfer pricing disputes, to provide certainty to taxpayers, to align safe harbour margins with industry standards and to enlarge the scope of safe harbour transactions, the Central Board of Direct Taxes (CBDT) has notified a new safe harbour regime," a Finance Ministry statement said here.

'Safe harbour' denotes the circumstances in which the Income Tax Department accepts the declaration by the assessee of the transfer prices at which various overseas divisions of a company transact with each other.

Under the revised safe harbour rules, for transactions involving provision of software development and IT-enabled services (ITeS), safe harbour margins have been reduced to a peak rate of 18 per cent, from 22 per cent in the earlier regime.

The new regime "has come into effect from 1st of April, 2017, that is assessment year (AY) 2017-18 and shall continue to remain in force for two immediately succeeding years thereafter, that is up to AY 2019-2020", the statement said.

The new regime would be available for transactions up to Rs 200 crore in relation to IT services, knowledge process outsourcing services, contract research and development services wholly or partly relating to software development or generic pharmaceutical drugs.

For "transactions involving provision of knowledge process outsourcing services, a graded structure of 3 different rates of 24 per cent, 21 per cent and 18 per cent has been provided, based on employee cost to operating cost ratio, replacing the single rate of 25 per cent in the previous regime", it said.

For "transactions involving provision of contract research and development services wholly or partly relating to software development and provision of contract research and development services wholly or partly relating to generic pharmaceutical drugs, safe harbour margins have been reduced to 24 per cent from 30 per cent and 29 per cent respectively in the previous regime", it added.

Safe harbour rules, which were introduced through Finance Act 2009 to reduce the transfer pricing disputes, were given final shape in 2013. --IANS

bc/dg