True to his commitment towards enabling a non-adversarial tax administration, especially for transfer pricing, Finance Minister P. Chidambaram, in his budget speech, set March 31, 2013, for submission of all expert committee reports. The transfer-pricing safe harbours are expected in the coming months.

The safe harbour concept was introduced into transfer pricing regulations in 2009 to provide a degree of certainty to taxpayers. However, despite numerous industry consultations by the Board, the safe harbours have not been prescribed till date. In the meantime, transfer pricing disputes and the resulting adjustments in appeal have pushed India to the top-three most litigious countries in transfer pricing.

What is a ‘safe harbour’?

A ‘safe harbour’ refers to circumstances in which the income-tax authorities shall accept the transfer price declared by the taxpayer.

In practice, a safe harbour involves providing guidance on activities and margins to ensure revenue authorities accept the transfer price without much scrutiny. Under Safe Harbour Rules, transfer prices are automatically accepted by revenue authorities, thereby reducing or eliminating the compliance burden and uncertainty.

Globally, several countries have prescribed safe harbours. The Organisation for Economic Cooperation and Development (OECD) issued draft guidance in September 2012 on the formulation and implementation of safe harbours.

The guidance also prescribes sample memorandum of understanding (MoU) for the competent authorities of treaty countries to establish bilateral safe harbours for low-risk manufacturing, distribution, and research and development services.

Benefits of Safe Harbour Rules

The main benefits of Safe Harbour Rules include administrative simplicity for the tax department, and relief from onerous annual documentation and transfer pricing certainty for the taxpayer.

These are of special significance to companies in the information technology and business process outsourcing (BPO) sectors. Taxpayers engaged in cross-border, related-party IT-ITES services have witnessed a spate of high-pitched transfer pricing assessments over the past eight years, thanks to transfer pricing audits by revenue authorities. Given the current level of transfer pricing litigation, the Safe Harbour Rules are something to watch out for.

Applicability of Safe Harbour Rules

Although the nature of safe harbours is not available in the public domain, they are generally expected to be for the IT-ITES sector, corporate guarantee fees, contract R&D, and interest on loans.

At present, various corporates are filing their formal Advance Pricing Agreement applications, and it will be interesting to see at what level the safe harbours are pegged, and the cost-benefit of the APA scheme vis-à-vis the safe harbours.

The author is Partner, Transfer Pricing Services, Grant Thornton India LLP

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