The report by Deloitte India, argues that the countrys new rules will improve taxpayer certainty and ease the administrative burden on the tax authorities. However, it also states that there is a risk that the provisions could also lead to adverse effects including double taxation.
Safe harbour provisions were announced in Julys budget. It was explained that the safe harbour will take two forms. These are the exclusion of certain classes of transactions from transfer pricing regulations and the stipulation of margins or thresholds for prescribed classes of transactions.
The report highlights the benefits of the new rules. It suggests that the rules have been designed as a comfort mechanism as they will allow greater flexibility especially in the areas where there are no matching or comparable arms length prices.
Another advantage provided by a safe harbour would be the certainty that a taxpayers transfer prices will be accepted by the tax administration.
Despite these positives, the report suggests that safe harbour rules are likely to have an impact on multinationals operating within India. It was explained that the availing of safe harbour provisions in one country with a certain specified transfer price could lead to different transfer prices, following the arms length principle. This could trigger double taxation risks.
Taxpayers may also be more likely to dispute a transfer pricing adjustment in the country where they have applied safe harbour provisions to prevent double taxation.
The report also calls on the tax authorities to clearly define the types of costs to be included in the cost base for the purpose of determining the arms length price.
Safe harbour provisions truly represent a double-edged sword. While formulating the safe harbour policies [the tax authorities] should always remember that while these provisions provide the needed relief of certainty, simplified method and administrative ease to tax authorities, the same provisions could lead to adverse effects, if not formulated or applied in an appropriate manner in the various cases of taxpayers/transactions, said the report.
Other countries that have introduced safe harbour rules to their transfer pricing regulations include Australia, Brazil and Mexico.