In a effort to reduce transfer pricing disputes, the Indian government June 8 rationalized 'safe harbor' rates to induce more foreign companies to take advantage of the mechanism and reduce transfer pricing disputes.
"In order to reduce transfer pricing disputes, to provide certainty to taxpayers, to align safe harbor margins with industry standards and to enlarge the scope of safe harbor transactions, the Central Board of Direct Taxes has notified a new safe harbor regime," a Finance Ministry statement said in New Delhi.
'Safe harbor' denotes the circumstances in which the Income Tax Department accepts the declaration by the assessee of the transfer prices at which various overseas divisions of a company transact with each other.
Under the revised safe harbor rules, for transactions involving provision of software development and IT-enabled services, safe harbor margins have been reduced to a peak rate of 18 percent, down from 22 percent in the earlier regime.
The new regime "has come into effect from 1st of April 2017, that is assessment year 2017-18 and shall continue to remain in force for two immediately succeeding years thereafter, that is up to AY 2019-2020," the statement said.
The new regime will be available for transactions up to Rs. 200 crore in relation to IT services, knowledge process outsourcing services, contract research and development services wholly or partly relating to software development or generic pharmaceutical drugs.
For "transactions involving provision of knowledge process outsourcing services, a graded structure of 3 different rates of 24 percent, 21 percent and 18 percent has been provided, based on employee cost to operating cost ratio, replacing the single rate of 25 percent in the previous regime," the statement further said.
For "transactions involving provision of contract research and development services wholly or partly relating to software development and provision of contract research and development services wholly or partly relating to generic pharmaceutical drugs, safe harbor margins have been reduced to 24 percent from 30 percent and 29 percent respectively in the previous regime," it added.
Safe harbor rules, which were introduced through the Finance Act 2009 to reduce the transfer pricing disputes, were given final shape in 2013.
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