Safe Harbour Rules - A step towards maturity

The recent times have witnessed increasing disputes in the Transfer Pricing (TP) arena and the recent budget proposal to introduce Safe Har-bour Rules is an effective step to achi-eve certainty in this regard. “Safe Har-bour” means circumstances in which the Tax Authorities shall accept the transfer price declared by the assessee without undertaking a detailed scrutiny. Basic intention beh-ind the introduc-tion of the Rules, as spelt in the spe-ech of the Fina-nce Minister, is to reduce the impact of judgmental errors in determination of transfer price of international transactions.

Safe Harbour provisions are being practiced by several mature practices acr-oss the globe. For instance, in Australia and New Zealand, a 7.5 per cent mark-up on cost is generally accepted as an arm’s length margin for the non-core services. Similarly, US has prescribed a Safe Harbour for routine services such as payroll compilation, processing workers compensation, posting payments etc., where the services charged at cost (without mark-up) are considered to be at an arm’s length

 

Adoption of Safe Harbour rules, absolves the taxpayers from the burden of a detailed benchmarking analysis while retaining the onus to maintain documentation for intra-group transactions. It will be interesting to observe the likely form in which the proposed rules would be introduced in India as far as the extent, scope of documentation and related compliances are concerned.

Though Safe Harbour provisions offer benefits to both tax payers and tax authorities in terms of compliance rel-ief, certainty and administrative simpl-0icity, application of Rules pose a risk of double taxation. Double taxation arises from the adoption of mark-ups not acceptable in the other jurisdiction. For example, say the Safe Harbour for a particular service in Australia is 7.5 per cent whereas the accepted arm’s length margin in the recipient country is 4 per cent; adoption of Safe Harbour will result in a double taxation.

To avoid such potential doubletaxation, it is recommended that the margins / conditions for activities pro-posed in the Indian rules should be deci-ded considering their broad acceptability in the overseas jurisdiction. Consi-dering the variations in the acceptable margins in various jurisdictions, it is suggested that a range of margins should be prescribed.

Also, since such Rules are being introduced for the first time, it is sug-gested that the draft of the Safe Har-bour Rules framed by the Central Board of Direct Taxes be offered for public consultation, as is being done for the Direct Tax Code. This will result in development of framework that has acceptability by the taxpayers at large.

Introduction of Safe Harbour Rules is a welcome measure which by prov-iding certainty will help resolve the protracted disputes between the taxp-ayer and the tax authorities. Additio-nally, the certainty and administrative convenience offered by the Rules would be an additional incentive that will increase the attractiveness of India as an investment jurisdiction.

In associates with Shuchi Ray & Arun Saripalli

The Authors are Dhaivat Anjaria – Executive Director, Arun Saripalli – Manager and Shuchi Ray – Senior Manager, PricewaterhouseCoopers.
Views presented herein are personal and do not necessarily reflect those of the firm