India unveils steps to reduce corporate litigation, disputes.
By Rajiv Theodore
NEW DELHI: Showing determination in placating the corporate world, the government has set in motion a set of rules aimed at reducing corporate disputes and litigations involving cross–border wrangles.
The Finance Minister P Chidambaram has unveiled a transfer price dispute mechanism where the multi-national companies and their arms will not be bothered by income-tax sleuths and would be protected under the so called ‘’safe- harbor’’ concept. This would benefit companies mainly in sectors like the Information Technology and enabled Services, pharma and automobiles, experts say.
About 27 companies, including the local units of HSBC, Standard Chartered and Vodafone have underpaid taxes in the last fiscal year after they sold shares to their overseas arms too cheaply. India has, therefore, targeted several multi-national companies for tax audits on transfer pricing in recent years, but has widened the scope of its investigations since last year.
Talking to reporters in New Delhi, the Revenue Secretary said, “These rules will provide certainty, and ensure that there is less litigation.â€
Notified on Wednesday, these rules had been now made more industry friendly. These very norms, as is the practice, had last month been released for public comments.
The move is also in line with the budget promise of Chidambaram where he had pledged for safe harbor rules to address transfer pricing disputes. The new rules will be applicable for five years beginning assessment year 2013-14, instead of the two years specified in the draft.
The final norms lay down a set procedure for calculating ‘arm’s length price’, a concept that would ensure that both parties are not acting in their own self-interest. In the draft regulations, only transactions below Rs.100 crore were eligible for getting the safe harbor benefits. The final rules have done away with this ceiling.
Transactions up to Rs.500 crore will be now eligible for safe harbor, provided the operating profit margin that is declared in relation to operating expense is 20 per cent. For transactions above Rs. 500 crore, this margin should be 22 per cent. The government has also removed the ceiling of Rs.100 crore for transactions such as corporate guarantees between group companies. Transactions of this nature will escape the tax department’s scrutiny if the wholly-owned subsidiary is given the highest rating by a rating agency.
Also, the definition of knowledge process outsourcing (KPO) has also been rationalized to provide reasonable distinction from regular business process outsourcing activity. The safe harbor operating margin for this sector has been reduced to 25 per cent from 30 per cent, as per the recommendations of the Rangachary panel. With respect to KPO business, the transaction threshold has been removed. The income-tax department had set clear timelines in which action would be taken under these rules.
Multi-national companies have drawn increased scrutiny by governments around the world over transfer pricing, particularly following revelations that coffee chain Starbucks Corp used the practice to avoid paying taxes in Britain.
Transfer pricing, or the value at which companies trade products, services, shares or assets between units across borders, is a regular part of doing business for a multi-national. Experts say transfer prices are also a way for a company to minimize its tax bill.
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