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Govt issues guidelines to bring greater clarity in cross-border transactions
September, 19th 2013

The finance ministry on Wednesday sweetened the deal for multinationals and Indian companies with overseas arms, involving cross-border tax disputes, in a bid to avoid litigation and boost investor confidence.

The government has issued "safe harbour" rules to bring greater clarity in cross-border transactions. The rules usually come with fixed prescribed margins and involve simpler compliance commitments than the general transfer pricing rules. Safe harbour rules are globally accepted norms although countries have tailored them to suit their specific requirements.

Transfer pricing applies to cross-border transactions of companies and their affiliates in other countries. The rules enable tax authorities to "value" goods and services exchanged between these companies as they are not done at "market prices".

In recent months several global giants such as Vodafone and Shell have complained of being adversely hit by the tax department's transfer pricing moves.

As a result, the government had issued draft rules, which have now been finalized after incorporating several suggestions made by investors. "The government has responded very quickly (to the suggestions) and that shows its commitment to improve the business sentiment," said Rahul Garg, head of direct tax practice at consulting firm PricewaterhouseCoopers.

"The litigation on transfer pricing, which has grown significantly over the years, should abate as a result of this," added KPMG India deputy CEO Dinesh Kanabar.

The government has tweaked the rules from what it had originally proposed to address the concerns. The biggest comfort comes in the form of an assurance that starting assessment year 2013-14, the rules will be in place for five years, which industry views as a big positive.

The draft norms had proposed that only IT and ITeS companies with transaction size of up to Rs 100 crore would be covered by the rules. On Wednesday, revenue secretary Sumit Bose said the ceiling has been removed.

Through the rules the government has essentially provided that companies with operating profit margin beyond a prescribed level can opt for the rules. For instance, in case of IT and IT-enabled services, transactions up to Rs 500 crore have been provided a safe harbour of 20%, which will rise to 22% beyond the Rs 500 crore threshold. So, if both criteria are met, a company in the IT sector, for instance, can make use of the safe harbour rules and lower its compliance burden. In the final set of rules, a special dispensation has been provided for knowledge process outsourcing firms, which were earlier clubbed with IT-enabled services. For KPOs, the safe harbour operating margin has been cut from 30% to 25%.

"It (the revision) increases coverage of safe harbours to larger companies and moderates safe harbour margin for KPOs... The CBDT should have done away with the bifurcation of IT and IT enabled services, to avoid unnecessary classification disputes. The revision would also increase the number of multinational companies opting for safe harbours. However, for the Indian companies having foreign businesses, both on outbound loans and guarantees a lot more could have been done," said Vijay Iyer, partner at consulting firm EY.

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