Home >Politics >Policy >Income tax dept rationalises ‘safe harbour’ rates for MNCs

New Delhi: The income tax (I-T) department on Thursday liberalized its safe harbour rules, a set of presumptive taxation norms that help multinational companies (MNCs) avoid rigorous auditing of cross-border transactions with group companies.

Under the new rules, Indian units of MNCs declaring minimum operational profits specified in the safe harbour scheme—regarded by the I-T department as the industry standard for such transactions among unrelated parties—will not be subject to rigorous transfer pricing audits.

Transfer pricing audits are conducted by tax authorities to prevent MNCs from under reporting their income in one country and shifting it to a group company in a low or no tax jurisdiction.

The revised safe harbour scheme comes at a time when the tax compliance burden of MNCs is set to go up on account of a global effort coordinated by the Organization for Economic Cooperation and Development (OECD) to tackle aggressive tax planning of businesses. India was among 68 countries that signed a multilateral treaty in this regard on Wednesday.

The safe harbour scheme offers an easier compliance window to businesses in the information technology (IT) and IT-enabled services, software development services and contract manufacturers of pharmaceuticals and core and non-core auto components sectors. It also covers cross-border transactions of MNC group firms giving loans as well as corporate guarantees.

The new rules lower the minimum operating profits to be declared by MNC units to avoid an audit. They also introduce a safe harbour rate for low-value service transactions below Rs10 crore with a minimum operating profit of 5%.

The revised rules have reduced the minimum operational profits to be declared by IT-enabled services to avoid an audit to 17-18% depending on previous years’ turnover, down from 20-22% earlier. In the case of knowledge process outsourcing, the safe habour margins have been set at 18%, 21% and 24% depending on employee cost, compared to a flat 25% earlier.

The new rules also cover management fees, which is expected to help a large number of companies avoid transfer pricing audits on account of management fee receipt of up to Rs100 million.

Vijay Iyer, national leader of transfer pricing services at EY India said safe harbour margins have been reduced significantly, especially with regards to contract research and development in software, corporate guarantees and other software and IT services.

“While the safe harbour scheme has been made applicable for companies with turnover below a threshold, it should serve as an indicator for larger companies also," said Iyer.

He said these specified margins would also serve as an indicator in cases where companies and tax departments agree under the advance pricing agreement (APA) scheme to avoid audits. APA is a successful method tried in the country between businesses and the tax department to agree on operational profits from future transactions relying on certain economic presumptions to avoid audits.

Subscribe to Mint Newsletters
* Enter a valid email
* Thank you for subscribing to our newsletter.

Never miss a story! Stay connected and informed with Mint. Download our App Now!!

Edit Profile
My ReadsRedeem a Gift CardLogout