Safe harbour sends friendly message in a bottle to multinational companies
Multinationals’ escape window from a rigorous tax audit of their cross-border transactions will be wider than believed earlier. The government on Wednesday announced the final ‘safe harbour’ rules, exempting MNCs from audit if they declare the specified minimum profits and tax liability from Indian operations.
The final norms brought out by the Central Board of Direct Taxes (CBDT) allow all information technology and related (ITES) businesses, KPOs and MNCs extending corporate guarantees to wholly-owned subsidiaries to avoid a transfer pricing audit by following these rules irrespective of their turnover or the size of the guarantee.
The draft rules released in August had prescribed that the safe harbour would be available for businesses (transactions) up to Rs 100 crore only so long as the operating profits declared is not less than 20%. Under the final rules, transactions up to Rs 500 crore could escape audit if they declare 20% or more operating profit. For deals above Rs 500 crore a year, the minimum profit to be declared to avoid audit would be slightly higher at 22%.
MNCs could declare the stipulated minimum operational profits and avoid audit for five years beginning 2012-13.
Safe harbour profit margins are, in fact, higher than the profit margins determined by actual arm’s length price of cross-border transactions, but companies which want to avoid scrutiny of their transactions by tax authorities can declare the safe harbour profit margin and pay tax accordingly. These norms are brought in to reduce litigation on the value of intra-group transactions across borders, which has been rising exponentially in India.
In fact, the IT department had attributed about Rs 70,000 crore as additional income to the MNC units in India in its 2012-13 audit, which is 58% more than the department’s claim of income suppression from the previous year’s audit.
“This is a very positive development. Major concerns of the industry with respect to the safe harbour provision have been addressed in the final rules,” said Amit Maheshwari, partner, Ashok Maheshwary & Associates.
“The final safe harbour rules are positive, flexible and less conservative. Now, the safe harbour scheme is aligned to and is an alternative to advance pricing agreements and offer tax certainty for five years,” said Mukesh Butani, chairman, BMR Advisors. Rahul K Mitra, national leader, transfer pricing practice, PricewaterhouseCoopers (PwC) said safe harbour rates are not arm’s length prices but in the nature of presumptive taxation, which generally enthuse taxpayers to opt for the same as a compromise for not having to be involved in protracted litigation in a bid to obtain better results in taxation under substantive revenue audits.
“Whether or not any taxpayer should consider adopting the safe harbour rates, would actually depend upon its scale of operations, vis-a-vis the resultant tax impact,” said Mitra.
In the case of KPOs too, the Rs 100-crore turnover limit has been done away with. These units need to declare 25% operational profits to avoid an audit, against the 30% prescribed in the draft rules.
The Board also relaxed the norms for corporate guarantees. As per the final norms, corporate guarantees above Rs 100 crore to a wholly-owned subsidiary will not invite transfer pricing audit if the subsidiary has been rated to be of adequate to highest safety by a SEBI registered credit rating agency and has declared a commission of 1.75% of the guaranteed amount. For guarantees below Rs 100 crore, there is no requirement of credit rating for the subsidiary but the declared commission ought to be 2%.