Government officials told FE the threshold of R100 crore a year of international transactions for an entity to be eligible for taking benefit of the safe harbour rules, under which value of a specified deal would be accepted without an audit, will stay for two years before a revision.
Industry representatives and tax experts are of the view that due to the R100-crore threshold, large multinationals typically paying their captive units in India higher amounts every year for development work may not be eligible for using safe harbour norms.
The value of cross-border deals between allied entities called transfer price that authorities in India examine vigorously to check income suppression has been an area where tax litigation has been rising exponentially.
Transfer pricing rules in India is a relatively new area of tax regulation. We are introducing safe harbour norms on an experimental basis for two years. The R100-crore threshold could be reviewed in the light of experience after two years, said a person privy to the implementation of the rules.
MNCs having more than Rs 100 crore cross-border transactions with Indian units will have to accept the tax departments assessment of their operational profits as well as any possible upward adjustment in their tax liability.
Vijay Iyer, partner & national leader, transfer pricing, EY, said the exclusion of companies with turnover in excess of R100 crore would limit the number of takers for the safe harbour. There is no need to have such a threshold as there is no strong correlation between turnover and profit margins. MNC units with international transactions of, say, R200 crore may also be having profit margins in the same range of units with less than R100-crore turnover. So, there is no reason why those with higher turnover should be denied the benefit of safe harbour provisions, said Iyer.
Safe harbour is like a presumptive tax, not an arms length price which is arrived at after meticulous benchmarking analysis, said Rahul Mitra, national leader, transfer pricing at PwC India. Safe harbour is a compromise. That is, if a taxpayer wants to go ahead with meticulous transfer pricing benchmarking, he may get to lower the numbers (of operational profit) but it may lead to protracted litigation. Instead of that, under safe harbour rules, the Revenue is setting a rate (of operational profit on which tax is to be paid) higher than the arms length price, suggesting that the assessee could avail of it if he wants, said Mitra. It is for the tax payer to make the choice.
Officials, however, said that multinationals paying above R100 crore a year for software development, IT enabled services and knowledge process outsourcing services to Indian captive units, can anyway use the other options of dispute resolution allowed under transfer pricing rules. They can explore tools like advance pricing agreements (APAs) and mutual agreement procedure (MAP). The APA rules that the government introduced last August promise MNCs they wont be asked to revise upwards the value of cross-border deals with their Indian units for five years if they comply with their understanding with the tax authorities on the principles of arms length pricing.
In the case of disputes, MNCs are also allowed to request the competent authorities in India and in their home country to decide on how much income of the group could be attributed in which country to eliminate possibility of double taxation. MAP being a closed-door meeting between the two competent tax authorities does not involve the taxpayer, who is only informed of the outcome. It is generally considered a taxpayer-friendly option to resolve disputes, experts said.
Finland has requested MAP discussions with India after Finnish mobile handset major Nokia invoked MAP to resolve a tax dispute. Indian tax authorities can enter into an MAP with their counterparts in most of the 90 countries, with which New Delhi has double tax avoidance agreements.
The safe harbour rules announced by the Central board of Direct Taxes (CBDT) cover 10 specified types of transactions of MNCs, the value of which will not be audited by the tax department to see if they are at arms length if the norms are followed.