All material subject to strictly enforced copyright laws. © 2022 ITR is part of the Euromoney Institutional Investor PLC group.

Indian safe harbour rules are a “double-edged sword”

The introduction of safe harbour rules to India is a “double-edged sword” and the tax authorities need to be careful with how they implement them, says a report.

The report by Deloitte India, argues that the country’s new rules will improve taxpayer certainty and ease the administrative burden on the tax authorities. However, it also states that there is a risk that the provisions could also lead to adverse effects including double taxation.

Safe harbour provisions were announced in July’s budget. It was explained that the safe harbour will take two forms. These are the exclusion of certain classes of transactions from transfer pricing regulations and the stipulation of margins or thresholds for prescribed classes of transactions.

The report highlights the benefits of the new rules. It suggests that the rules have been designed as a comfort mechanism as they will allow greater flexibility especially in the areas where there are no matching or comparable arm’s length prices.

Another advantage provided by a safe harbour would be the certainty that a taxpayer’s transfer prices will be accepted by the tax administration.

Despite these positives, the report suggests that safe harbour rules are likely to have an impact on multinationals operating within India. It was explained that the availing of safe harbour provisions in one country with a certain specified transfer price could lead to different transfer prices, following the arm’s length principle. This could trigger double taxation risks.

Taxpayers may also be more likely to dispute a transfer pricing adjustment in the country where they have applied safe harbour provisions to prevent double taxation.

The report also calls on the tax authorities to clearly define the types of costs to be included in the cost base for the purpose of determining the arm’s length price.

“Safe harbour provisions truly represent a double-edged sword. While formulating the safe harbour policies [the tax authorities] should always remember that while these provisions provide the needed relief of certainty, simplified method and administrative ease to tax authorities, the same provisions could lead to adverse effects, if not formulated or applied in an appropriate manner in the various cases of taxpayers/transactions,” said the report.

Other countries that have introduced safe harbour rules to their transfer pricing regulations include Australia, Brazil and Mexico.

more across site & bottom lb ros

More from across our site

The winners of the ITR Americas Tax Awards have been announced for 2022!
US technology company Cisco Systems hopes shareholders will reject a proposal to make its CbCR public, while the UK approves an extradition case connected to the ‘cum-ex’ scandal.
Tax leaders have warned that the latest UK interest rate increases could land a further blow on MNEs, which are already struggling.
Panellists said OTP can improve corporations’ forecasting and data usage, with one describing improvements as 'night and day'.
Digital services companies are increasingly selective about the countries where they register for VAT, basing their choices on revenues and risks of penalties.
The Women in Business Law Awards is excited to present the shortlist for the first Global Awards
Like medicine, tax is an evolving science. Norah Al Khalaf explains how tax policies have changed across the member states of the Gulf Cooperation Council and what tax departments should prepare for next.
The departing OECD director said countries’ sovereignty is crucial to pillar two while speakers questioned current tax policies.
World tax leaders and departing OECD director Pascal Saint-Amans said they would work increasingly hard to implement pillar two, during the IFA Congress.
This week the European Commission is facing opposition over its windfall tax proposal, while Tesla is considering moving production to the US over tax breaks.
We use cookies to provide a personalized site experience.
By continuing to use & browse the site you agree to our Privacy Policy.
I agree