Move to simplify tax regime, reduce litigation and help improve
business environment
The finance ministry is streamlining safe harbour rules and
advance agreements, two mechanisms to determine the price of services rendered
by a multinational to its subsidiary in India.
Safe harbour rules — directives on margins the tax authorities
should accept for the transfer price declared by an assessee — have drawn a
tepid response since they were introduced a couple of years ago. There is also
a huge backlog in advance pricing agreements (APAs), an ahead- of- time
understanding between a taxpayer and the tax authority on an appropriate
transfer pricing methodology.
The move would simplify the tax regime, reduce litigation and help
improve the business environment, a finance ministry official said.
The steps will involve lowering the margins in safe harbour rules
and definitions will be reworked to remove ambiguities. India announced the
safe harbour rules in 2013, but the high margins of up to 25 per cent on total
operational profits have made it unattractive for companies to use them.
“We are addressing issues related to transfer pricing to align it
with best practices. We are revising the safe harbour rules that will include
revisiting the definition and revising the margins, considered high by
companies,” said a tax official.
Information technology (IT) and information technology- enabled
services (ITeS) companies with transactions of up to Rs.500 crore have a safe
harbour operating margin of 20 per cent and those with transactions above
Rs.500 crore have a margin of 22 per cent. Knowledge process outsourcing
companies have a safe harbour operating margin of 25 per cent.
Experts argue there is ambiguity in the definition of IT, ITeS and
knowledge process outsourcing companies with a lot of overlap. Moreover, the
margins decided in tribunals or in advance pricing agreements turn out much
lower, ranging between 15 and 18 per cent.
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Source:Business Standard, New Delhi, 4th Nov. 2015
