Foreign software and BPO services companies should be allowed to pay tax on a presumed rate of profit on inter-company transactions. The tax constancy firm Deloitte has suggested a 11-13% rate over costs for both software and BPO services in a white paper released on Tuesday.

Introduction of the safe harbour rules is expected to improve the foreign investment climate in the information technology and IT enabled services sector such as BPOs by providing clarity on tax liability and simplicity in tax administration.

The Budget 2009-10 had made an announcement in this regard and the Central Board of Direct Taxes, the apex direct tax body, is working on the rules expected to be announced soon.

To reduce the impact of judgmental errors in determining transfer price in international transactions, it is proposed to empower the Central Board of Direct Taxes (CBDT) to formulate safe harbour rules. finance minister Pranab Mukherjee had said in his budget speech.

A safe harbour would essentially mean circumstances in which, the Indian revenue Authorities shall accept the transfer pricing declared by the taxpayer.

Transfer pricing provisions in general require income arising from an international transaction between two or more related organisations to be calculated at an arms length price or at a price comparable to similar transactions between unrelated parties.

We have lost foreign investment to countries such as Sri Lanka, Philippines... Safe harbour provisions will create a conducive climate for foreign investments by reducing administrative burden, said Shonto Ghosh, senior director, Deloitte.

India had introduced transfer pricing norms in 2001 but complexity has resulted in an increase in litigation in such tax cases. Industry lobby bodies such CII, FICCI, Nasscom had in past asked the government to introduce safe harbour principles, advance pricing arrangements to provide certainty to already present MNCs and new investors.

Provision of safe harbours is common practice in some most advanced countries such as United States, Australia for non-core services as well as emerging economies including Brazil, Mexico and in some form even in China.