The Union Finance ministry is gearing up to streamline the safe harbor rules as well as advance agreements. These two mechanisms are meant to determine the cost of the services that are rendered by the multinationals to the Indian subsidiary.
The safe harbor rules are directives on the margins that the tax authorities must agree for the transfer price that is declared by the assessee. This has drawn a lukewarm response as it was introduced before a couple of years. There is a massive backlog in the advance pricing agreements (APAs) as well that is the time of understanding that exists between the tax authority and taxpayer.
This move will definitely make things easier when it comes to the tax regime, minimize the litigation and also help enhanced the business environment, stated an official working with the finance ministry. These steps will lower the margins involved in the safe harbor rules and also the definitions will be revised in order to eliminate the ambiguities.
The safe harbor rules were introduced in India in 2013, but the high margins up to 25 percent on the overall operational profit made it unattractive for the companies to implement the same.
The IT and ITeS companies that involve transactions up to Rs 500 crore have the safe harbor operating margins of 20%. Likewise, those companies that have transactions over Rs 500 crore have margins of 22%. The companies involved in knowledge process outsourcing have a safe harbor margin of 25%.
The experts argue that there exists vagueness in defining the IT, ITeS as well as knowledge process outsourcing firms as there is a lot of overlap. The margins that were decided in tribunals are advance pricing agreements are much lower between 15% and 18%. The reduction of the safe harbor rates will definitely ease the advance pricing agreement backlog. Earlier this year, the union finance ministry let rollback advance pricing agreements to let the multinational companies settle the taxes for the previous years. Around 40% of the APA applications exist from the IT/ITeS sector. Till September 2015, over 575 APA applications were filed. Of these, 14 have been concluded, 12 are unilateral and two are bilateral.