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Pranab Mukherjee outlined plans for a safe harbour back in 2009 |
India's Finance Ministry is reconsidering the introduction of safe harbour rules because of the difficulties in implementing them.
Pranab Mukherjee, the finance minister, proposed, in his 2009 budget speech, that the Central Board of Direct Taxes would formulate safe harbour rules to reduce the impact of judgemental errors in determining the transfer price in international transactions.
"The introduction of safe harbours was welcome news for taxpayers in India, especially in light of extremely high levels of transfer pricing disputes. It meant taxpayers saving some time and effort by not being required to document and justify at least some low value routine transactions," said Sanjiv Malhotra of BMR Advisors – Taxand.
The ministry is now having second thoughts about the feasibility of safe harbour rules in India.
"As we understand there has not been a consensus amongst the policy makers on the manner and form of introduction of safe harbours in India. On the issue of what transactions should get covered to actual benchmarks, there is a wide disparity in the views," said Malhotra.
It was recommended that the rules were introduced for non-core services, such as recharges, with international transactions.
"It's very difficult to generalise what are non-core [activities] and that is the problem the government is facing so it is probably for that reason [the government is reconsidering]," said Jitendra Grover, head of tax for Nokia, India.
While the rules would have a bigger impact on the information technology industries, because of the higher number of inter-company transactions, all non-core industries were keen to see the safe harbour rules introduced in the right spirit.
"Software development and back office sectors that have witnessed numerous transfer pricing adjustments in the past years, whereby revenue authorities have determined the arm's-length margin to be earned by such companies anywhere between 15-30%, were among the top aspirants anticipating relief with the introduction of safe harbour regulations" said Samir Gandhi of Deloitte Haskins and Sells.
"If there are safe harbour rules for any activity it's likely it will benefit or adversely impact, one or the other, our industry more. Our sector has lots of foreign investment and inter-company transactions," said Grover.
According to the Business Standard, an internal committee of the ministry recommended safe harbours for non-core activities with international transactions of less than Rs200 million ($4.5 million) and a rate of cost plus 20%.
"If this [20% rate] is true then we believe industry would be relieved that the government has dropped this idea. We would expect industry to be better off without safe harbour rules rather than with rules which are unrealistic and non-adaptable," said Malhotra.
Grover confirmed Malhotra's belief.
"A 20% to 30% rate would be bad for industry. If the government comes up with a reasonable rate that's excellent and will reduce litigation," said Grover. The ministry is not in favour of this approach either, hence their reconsideration.
There are other options available to reduce judgemental errors and litigation in transfer pricing.
"There aren't any direct substitutes but the intent and spirit of safe harbour can be implemented through a more relaxed set of documentation requirements and a risk based system of audit. There has been a lot of talk of advance pricing agreements (APAs) being an alternative but, to us, APAs would have their utility for high value complex transactions, whereas safe harbours were meant for routine, low value transactions," said Malhotra.
Changing the calculation method may also help.
"Adopting the concept of inter-quartile range in place of arithmetic mean would provide greater certainty to taxpayers and significantly reduce the quantum of cases under dispute" said Manisha Gupta of Deloitte Haskins and Sells.
