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Safe Harbour Draft Rules: The Cons!

Published on Fri, Aug 16,2013 | 14:09, Updated at Fri, Aug 16 at 14:13Source : 

By: Rohan K Phatarphekar, Head – Transfer Pricing, KPMG India

To alleviate uncertainty faced by taxpayers and at the same time ensure an acceptable level of taxable profit, introduction of the much awaited safe harbor provisions appears to be a step towards mitigating litigation. The safe harbour rules however seem to be covering relatively smaller players in the IT/ITES and KPO sectors. It seems that the Indian head-quartered companies which are also facing considerable transfer pricing litigation and uncertainty may not be able to benefit from these rules.

The prescribed cost plus ratios appear to be above the taxpayer’s expectations for KPO services and Contract R&D services sector. Further, controversies may arise on categorization of taxpayers into sectors like software development v/s Contract R&D in software development, ITES v/s KPO services etc.

The safe harbour on Intra-group loans to non-resident Wholly Owned Subsidiary, applies in case loans are sourced in Indian Rupee, practically such loans would be advanced in foreign currency. Application of SBI base rates i.e. a domestic lending rate to foreign currency lendings seem to be on higher side from a taxpayer’s perspective.

Safe harbour Rules are generally not considered to meet the Arms Length Standard and may result in double taxation. Further, considering a tax payer opting for safe harbour rules shall not be able to invoke Mutual Agreement Procedure, risk of double taxation would not be mitigated.

The provision pertaining to maintenance of mandatory documentation and filing of Accountants Report may be perceived as burdensome by tax payers opting for safe harbour rules.

The elaboration of operating expense and revenue will provide much needed guidance to taxpayers as well as revenue authorities in computing operating margins.

Generally, safe harbors provide for circumstances in which a certain category of taxpayers can follow a simple set of rules under which transfer prices are automatically accepted by the revenue authorities. Safe harbor provisions essentially aim to benefit taxpayers and tax administrators with benefits of compliance relief, administrative simplicity and certainty. Considering that revenue authorities have solicited suggestions on the draft rules, taxpayers could avail this opportunity to make appropriate representations enabling a more viable safe harbour regime in India.


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