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India Consults On Safe Harbor Rules

by Mary Swire,, Hong Kong

16 August 2013

The Indian Finance Ministry has launched a consultation on proposed new transfer pricing safe harbor rules.

Reform of the transfer pricing system has been something of an ongoing project for the Finance Ministry. The 2009 Finance Act stipulated that the calculation of an arm's length price was to be subject to safe harbor rules, which would be drawn up by the Central Board of Direct Taxes.

However, the Ministry admits that no agreement could be reached on the regime's final shape. A committee was set up in July last year to finalize provisions, and in September the Government approved the committee's recommendation that it complete the rules for a number of sectors.

The Ministry has now announced that it has accepted, with some modifications, the remainder of the committee's proposals. The safe harbors drafted by the committee for the IT and ITES sectors, contract research and development (R&D) in the IT and pharmaceutical sectors, financial transactions involving corporate guarantees and outbound loans, and auto ancillary equipment manufacturers, will enter into force for the two assessment years beginning in 2013/14.

A taxpayer opting to use the rules will not be allowed to invoke any mutual agreement procedure provided under a relevant double tax avoidance agreement (DTAA). If the declared transfer price is accepted by a Transfer Pricing Officer, the taxpayer will be notified within six months of the original declaration.

The rules will not apply to any international transaction entered into with an associated enterprise in a country or territory listed in the Income Tax Act, or in a no- or low-tax jurisdiction. Where the rules are not applicable for a taxpayer providing R&D services with insignificant risks, the Transactional Net Margin Method will typically be considered the most appropriate for determining the arm's length price.

Interested parties can submit comments on the rules until August 26.

TAGS: Finance | Transfer Pricing | tax | India | tax avoidance | audit | transfer pricing | services | research and development

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