Safe harbour tax rules eased to coax MNCs

The income tax (I-T) department has eased its safe harbour rules, the term for a mechanism to avoid litigation involving transfer pricing. The change is aimed at wooing multinational corporations.

Such rules, if agreed to by companies, would provide immunity to such taxpayers from transfer pricing audits. There are other methods to address disputes in this regard, too, such as advance pricing agreements (APAs) and mutual agreement programmes.

Safe harbour rules, however, do not apply to transactions over a threshold. The new rules, to take effect from the current assessment year, are available for transactions limited to Rs 200 crore in software development services, information technology-enabled services (ITeS), knowledge process outsourcing (KPO) services, contract research and development services related to software or generic pharma drugs.

In respect of transactions involving software development services and information technology-enabled services, the safe harbour margins have been reduced to a peak rate of 18 per cent, from 22 per cent earlier.

On transactions involving KPO, a graded structure of three rates — of 24, 21 and 18 per cent — has been provided, based on employee cost to operating cost ratio. This replaces the earlier single rate of 25 per cent.

For transactions involving provisions on contract research and development services, the margins have been reduced to 24 per cent, from 29-30 per cent.

Eric Mehta, partner, transfer pricing, with consultancy PwC, said while come companies would be attracted, not all would. Amit Agarwal, partner, Nangia & Co, said: "While the regulations are a welcome relief, the scope is still quite restrictive, specifically with respect to large software and ITeS companies having annual turnover in excess of Rs 200 crore."

Arun Chhabra, Director, Grant Thornton Advisory, said the rates for the IT/ITeS segment were roughly in line with APAs being settled and, hence, the scheme should get a positive response. "It is certainly a step in the right direction," he said.

A new category of transactions has been introduced, termed receipt of low value-adding intra-group services. Mehta said the category was suggested by the base erosion and profit shifting rules of the Organisation for Economic Co-operation and Development. It would apply up to Rs 10 crore in international transactions, with five per cent margins.

Risk spreads on intra-group loans denominated in foreign currency will be benchmarked to the six-month London Inter-Bank Offer Rate as on end-September of the relevant year. And, on loans denominated in rupees to the one-year State Bank of India marginal cost of funds-based lending rate as on April 1 of the relevant year.