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Indian Transfer Pricing (Safe Harbour) Rules

November 28, 2013

Transfer pricing allows multinational corporations (MNCs) and their related parties to allocate worldwide profit to countries with lower tax rates; thereby allowing multinational corporations to minimize the amount of overall taxes paid.

In order to prevent transfer pricing abuse, many countries have established transfer pricing rules. These rules can assist in determining what constitutes arm’s length prices and how analysis should proceed amongst related party transactions within multinational corporations.

In response to the increased amount of business between India and North America, our team of international tax professionals at AG Tax has prepared a brief summary on India’s transfer pricing (safe harbour) rules as well as the implications for North American Multinational companies.

Summary of India’s Safe Harbour Rules

• India’s safe harbour rules are applicable for a 5-year term beginning in 2013-2014.

• Taxpayers can utilize the safe harbour rules for a specific amount of time. For example, after the second year of selection, taxpayers can voluntarily opt-out of the safe harbour regime, provided that the opt-out action is supported by the submission of relevant qualifying statements.

• Safe harbour rules are available only to multinational corporations who satisfy all eligibility conditions.

• Safe harbour rules provide minimum operating profit margins in relation to the operating expenses that a taxpayer is expected to earn for international transactions.

• Taxpayers are required to account for minimum profit margins (which are outlined in detail in the rules) and pay local taxes accordingly.

Implications for North American Multinational Companies

• The ceiling for North American Software / Information Technology Services and Information Technology Enabled Services companies has been raised from INR 1 billion to INR 5 billion. The safe harbour margin for these companies has been increased to 20% for transactions below INR 5 billion and 22% for transactions beyond this threshold. This provides an opportunity for increased transactions.

• North American companies interested in moving an intra-group loan to a wholly owned Indian subsidiary can utilize the threshold and interest rate guidelines from the new safe harbour rules when establishing loan arrangements. Interest rates should be equal to or greater than the base rate of the State Bank of India (as of 30th June of the relevant previous year), plus 150 basis points for loans below INR 500 million, or plus 300 basis points for loans greater INR 500 million.

• The ceiling for Knowledge Process Outsourcing (KPO) has been removed. Additionally, the operating margin for KPO has been reduced from 30% to 25%.

• For companies that are in the business of contract Research and Development, transactions with insignificant risks that are wholly or partly related to software development or generic pharmaceutical drugs are protected (provided that the profit margin to operating expense is greater than 29% or 30%).

• Manufacturers and exporters of automotive components may enjoy raised limits to their transactions if 90% of their revenue is generated from the sale of Original Equipment Manufacturer.

• Provided that multinational companies meet all eligibility conditions, and comply with all safe harbour rules, local tax authorities will accept transfer prices.

AG Tax LLP Can Help

If you have any tax-related queries, need assistance with tax planning or filing your tax returns please contact us. Our team comprises of highly experienced tax professionals with extensive knowledge of U.S. and Canadian tax laws as well as cross-border compliance

Furthermore, as a full service accounting firm, AG Tax assures complete assistance with even your most complex tax needs.

We can assist with:

  • Canadian Personal and corporate tax returns
  • Cross Border Taxation and Business Planning
  • U.S. Personal and Corporate Taxation
  • Disclosure of Foreign Assets and other information filings
  • Retirement planning
  • State Sales Tax & E-commerce Taxation
  • Estate Planning, Inheritance tax advice

To obtain a quote or to arrange for a consultation to discuss your tax related queries, please contact us at:

  •  416-238-5920 (Greater Toronto Area, ON)
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Disclaimer: The information in this publication is accurate as of the time of its publication. AG Tax assumes no responsibility for changes to tax legislation subsequent to the publication of this document. The information provided is for general information purposes only and should not be acted upon without seeking professional advice. If you would like to engage our services, please contact our staff and obtain authorization to send our firm confidential information. A client relationship is not created by the transmission of information. A client relationship is only formed with our firm when a scope and engagement letter signed by the firm and the potential client detailing the terms of engagement is present.

ABOUTAylett Grant Tax, LLP
With offices across Canada, we are positioned to manage and process the full scope of your Canadian, US and US Canada cross-border tax filing needs.
12752 28th Ave, Surrey, BC, V4A 2P4
104–4220 98 St NW Edmonton AB, T6E 6A1
With offices across Canada, we are positioned to manage and process the full scope of your Canadian, US and US Canada cross-border tax filing needs.
12752 28th Ave, Surrey, BC, V4A 2P4
104–4220 98 St NW Edmonton AB, T6E 6A1

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