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Indian safe harbour rules will be issued says Chidambaram

P Chidambaram, the Indian Finance Minister, said in his budget speech today that rules on safe harbours will be issued.

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The rules will be issued after reports on safe harbour, issued by a designated committee, have been examined by the Finance Minister on March 31.

The announcement is long-awaited by tax professionals who want to see more certainty over their transfer prices with a smaller burden on compliance.

Safe harbours will provide taxpayers with rules they can follow and a margin under which transfer prices will be automatically accepted by the tax authorities.

They should help to reduce the considerable amount of tax litigation in the country, as, for certain types of transfer pricing transactions, taxpayers will not need to collect as much transfer pricing data .

It is hoped the safe harbour rules will make India a more attractive location to invest in because they will lower the risk of transfer pricing adjustments by the tax authorities.

The rules were originally tabled in the 2009 Finance Act but the margins have still not been set.

“Specifying safe harbour norms is not easy,” said Samir Gandhi of Deloitte. “It involves identifying the activities which will be eligible for safe harbour and the determination of mark-up or a margin for such activities.”

Gandhi used Mexico as an example because of its safe harbour rules relating to maquiladoras (captive contract manufacturers operating under virtually risk-free conditions). He thinks this is a good model for India because of the large number of captive units in the country.

“To deal with this vexed issue, Mexico has established the following safe harbours for the activity of maquiladoras: 6.5% return on total costs and 6.9% return on value of assets employed. Similarly, Australia operates a safe harbour provision for services where 7.5% mark up on cost is accepted. Similar administrative practices of safe harbour are prevalent in Switzerland and Belgium.”

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