[Opinion] All about Safe Harbour Rule

CA Mohit Manav Sharma & Kavita Das – [2024] 158 taxmann.com 59 (Article)

Background and Global History of Safe Harbour

Introduction

The UN TP manual defines Safe Harbour as-

“A provision in the tax laws, regulations or guidelines stating that transactions falling within a certain range will be accepted by the tax authorities without further investigation.”

Safe Harbour Rules (“SH Rules”), in the Transfer Pricing (“TP”) regime, are a set of rules or conditions, which relieve taxpayers from certain obligations, which are generally imposed on the taxpayers by provisions of Chapter X i.e. Transfer Pricing Regulations.

Determination of Arm’s Length Price (“ALP”) is often time-consuming, burdensome and costly, considering an Associated Enterprise (“AE”) has a variety of intra-group transactions. Further, there have been many litigations on TP issues.

Hence, SH Rules provide certainty to taxpayers by ensuring that tax authorities will accept the price charged or paid by taxpayers with a limited scope of verification.

Need of SH Rules

• Difficulties faced by taxpayers in finding comparable for low-value-adding services.
• Significant increase in litigation w.r.t. TP issues.
• Increased amount of confusion w.r.t. determination of ALP in sectors such as KPO Services, R&D Services and certain low value-adding services.
• Burdon of TP compliances on smaller taxpayers or for low-value transactions.

Objectives behind SH Rules

• Provide simplified methods for determining ALP for international transactions by AEs.
• Reduce the number of litigations and compliance cost for eligible taxpayers.
• ‘Administrative Simplicity’ i.e. helps tax authorities to focus on more complex and higher risk areas.
• Providing Certainty that the taxpayer’s transaction value will be accepted by tax authorities.

OECD Guidelines on SH Regulation

Recap to 1995

• The Organization for Economic Co-operation and Development (“OECD”) issued guidelines in relation to SH Regulations.
• However, it was believed that such regulations will have negative impact on the tax revenues of the country.
• Accordingly, the SH was not acceptable at that point of time.
• Still, many countries implemented SH Rules and used them for limited type of transactions which were having less complications.

May 2013

• After realizing how SH Rules affected the nations who adopted them, OECD concluded that, when implemented properly, the advantages of SH Rules would exceed the drawbacks.
• Thereafter, on 16 May 2013, OECD issued revised Section E on SH in Chapter IV of its TP Guidelines.

Drawbacks Associated With SH Rules

• Resulted into providing scope for Tax Planning and Tax Avoidance.
• Resulted into risks which inter-alia includes double taxation, double non-taxation and mutual agreement concerns.

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