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Tax officers would need intensive training on transfer pricing
September, 20th 2013

The government has done well to firm up simple rules that software and other MNCs can follow in pricing services when they do business with their parent outfits or subsidiaries. It has fixed a mark-up on costs, known as safe harbour, for six sectors, including information technology (IT), IT-enabled services (ITeS), automobiles and pharmaceuticals.

That taxmen will accept transfer prices declared by companies opting for safe harbour and free them from audits is welcome. It will lower disputes, curb arbitrary tax demands and lend certainty to their tax outgo.

This would boost India's appeal as a software and R&D hub. However, India's tax officers would need intensive training to deal with the new regime as transactions within group companies are becoming increasingly complex in a globalised economy and transfer pricing rules now apply to transactions between domestic companies within the same group.

Most of industry's demands have been met in the final rules, with which all IT, ITeS, knowledge process outsourcing ( KPO) units, contract R&D in IT and pharma, and MNCs extending corporate guarantees to wholly-owned subsidiaries can avoid audits. A more liberal regime will encourage more MNCs to opt for safe harbour rules. A lower mark-up for KPOs will soften their tax blow as well. MNCs can follow these rules for five years, against two years proposed in the draft rules. A longer tenure will lend more certainty to the taxpayer.

Today, MNCs can choose between safe harbour rules and advance pricing agreements to compute transfer prices for transactions within group companies. This is progress. A modern tax administration without arbitrariness, clear tax rules and low tax rates will accelerate growth. MNCs will then have no incentive to shift profits out of India.

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