Simplifying safe harbour rules

No respite for large multinationals

The Government, as promised, has been consistently working towards creating a non-adversarial tax regime. In order to provide tax certainty and reduce litigation, the Central Board of Direct Taxes (CBDT) introduced Transfer Pricing Safe Harbour Rules in 2013. These Rules provided safe harbours for certain transactions that have historically been subject to intense litigation – eg. IT/ITES, intra-group financing, R&D, etc. The latest amendments clarify certain aspects of the applicability of safe harbours and align the eligibility margins to industry expectations.

These amendments are expected to make Safe Harbours a more viable option for small and medium-sized multi-nationals seeking transfer pricing certainty.

However, the upper thresholds on turnover, the employee cost ratio and the value of international transactions would keep the large multi-nationals from seeking cover under Safe Harbours. They will have to resort to Advance Pricing Agreements to gain transfer pricing certainty. Alternatively, they could choose to defend their transfer pricing before tax officers during assessments.

While Safe Harbours would help in providing certainty for future, it could do little to resolve past disputes. The reduced eligibility margins are only applicable for the assessment year 2017-18 onwards. It is expected that Safe Harbours may have some persuasive value to settle past disputes, but only in cases of taxpayers who opt for them. In the past, a generic reference to safe harbour provisions in litigation has been discouraged by courts.

Though the Rules appear to have widened the coverage of transactions and provide relaxed margins; contrary to expectations, there is no respite from the burden of documentation and compliance to a taxpayer opting for Safe Harbours.

It is also important to note that the old safe harbour margins were available for a period of 5 years. However, the new regime restricts applicability to 3 years. A corporate taxpayer is thus encouraged to evaluate its options and accordingly determine transfer pricing positions.

(the author is partner, tax & regulatory services at BDO India)