India to Ease Transfer Pricing Rules

September 14, 2010 Taxation in India

Happy Independence Day!Indian units of foreign companies could soon benefit from eased regulations surrounding the scrutiny and compliance issues of transfer pricing in their annual tax returns.

New “safe harbor rules” could soon be instated in India, allowing tax authorities to accept the transfer pricing returns of local units of foreign companies without scrutiny. The announcement was made on September 13th by S S N Moorthy, Chairman of the Indian Central Board of Direct Taxes (CBDT).

Currently local subsidiaries of foreign firms are required to clear their transfer pricing returns with the Income Tax Department before filing their annual tax obligations. Under the proposed changes, subsidiaries would be required to follow a set of pre-determined “norms” which will bypass assessment requirements and allow annual tax returns to be filed without scrutiny. The exact details of the new regulations have not yet been finalized, however S S N Moorthy commented on their progression, saying: “…safe harbor rules are at an advanced stage of consideration. I can’t share how the guidelines are going to be…[but] it will be a very favorable program… and it will be in place as early as possible.”

The new transfer pricing rules are being investigated by panel committee within the CBDT, which consists of both industry representatives and members of the Institute of Chartered Accountants of India. Local taxation experts are expecting that the panel will soon announce that the “safe harbor” rules will only be applicable to firms with INR 200 million (approx. USD 4.32 million) of overseas transactions annually. Additionally, applicable companies will be given three extra months within which to file their tax returns. According to S S N Moorthy, when the new rules are implemented they will accommodate the national General Anti Avoidance Rules (GAAR), albeit in a “very modest, responsible and tax friendly manner.”

Photo by Ashu Mittal