Govt issues draft 'safe harbour' norms for multinational firms

NEW DELHI: The government today came out with draft 'safe harbour' norms for deciding on transfer pricing liabilities with an aim to reduce litigations related to taxation.

These rules, mainly for multinational companies having operations in the country, would help in addressing taxation issues related to valuation of their transactions across borders.

It comes against the backdrop of rising instances of tax disputes involving overseas companies.

The Central Board of Direct Taxes (CBDT) today sought suggestions from stakeholders on 'safe harbour' rules.

Generally, 'safe harbour' refers to circumstances in which the income-tax authorities shall accept the transfer price declared by the assessee.

The norms pertain to transfer pricing, which implies the prices at which various overseas divisions of a company transact with each other.

To look into the issue of 'safe harbour', the government had set up the Rangachary committee. Major recommendations of the panel have been accepted by the government.

"Safe harbour for the sectors recommended by the Rangachary committee shall be applicable for two assessment years beginning from 2013-14," an official release said.

Consultancy Ernst & Young's Partner and National Leader (Transfer Pricing) Vijay Iyer said the draft safe harbour rules is a positive step to try and reduce litigation.

"In order to positively impact dispute resolution, the margins or safe harbours proposed in the draft rules may need to be recalibrated to a more acceptable zone," he said.

Noting that taxpayers have been eagerly waiting for the safe harbour rules, Iyer said the exclusion of companies with turnover in excess of Rs 100 crore would limit the number of takers for the safe harbour.

Among others, the draft rules have said that a taxpayer opting for safe harbour rules shall not be allowed to invoke Mutual Agreement Procedure (MAP) under their relevant Double Taxation Avoidance Agreements (DTAAs).

After extensive consultations, the Rangachary committee submitted six reports on Taxation of Development Centres and IT Sector and other sectors.

Consultancy Deloitte Haskins and Sells' Leader (Transfer Pricing) Samir Gandhi said that safe harbour is very welcome and a positive step by the CBDT.

"This should clearly bring about the much needed certainty for small and medium enterprises specially in respect of provision of software development services and information technology enabled services," Gandhi added.

Stakeholders can submit their comments on the draft rules till August 26.