Though comparisons can be odious, one cannot restrain oneself from comparing the present Finance Minister’s tenure to that of Virender Sehwag at the crease — there is an amalgam of both optimism and surprise till it lasts. In contrast, the Prime Minister is constantly being compared to playing a Geoffrey Boycott type of innings.

When the former Finance Minister opted for the safer office of the President, the Prime Minister, during his brief stint as Finance Minister, was all aggression and action. He quickly set up a committee to look into such matters pertaining to IT sector and research and development related activities.

A panel has already been set up to review the General Anti-Avoidance Rules (GAAR) provisions to address the concerns of foreign investors.

There is still need to address certain issues relating to the IT sector, such as the approach to taxation of development centres, tax treatment of ‘onsite services’ of domestic software firms, and the issue of finalising the ‘safe harbour’ provisions announced in Budget 2009-10.

Safe harbour principles are international disclosure practices to check litigation in transfer pricing. The committee will finalise safe harbour rules individually, and sector-wise and submit draft provisions for three sectors/sub-activities each month starting end-September.

The Internal Revenue Service (IRS) in the US has many safe harbour rules. For instance, for individuals and families who pay (or should pay) quarterly estimated taxes, there is a safe harbour rule which states that as long as the amount they pay the IRS this year is as much as they paid last year, the IRS can’t charge any penalties or interest.

Transfer pricing

While introducing the safe harbour provisions in the Budget, the then Finance Minister had stated that this was being done to reduce the impact of judgmental errors in determining the transfer price for international transactions.

The question that remains unanswered is — judgmental errors by whom? While the tax-payer feels that the revenue authorities always compare apples with oranges when it comes to transfer pricing, the authorities feel that the transfer pricing approach of the tax-payer is riddled with loopholes.

The tax-payer feels that the variance of 5 per cent that was previously available in the transfer price was such a miniscule percentage that it is as good as not having one at all. The jury is still out on these aspects.

Since the introduction of transfer pricing laws, applicable entities have been paying tax after fixing their transfer pricing rate.

However, it cannot be denied that the revenue authority has gone overboard in quite a few cases and passed orders passed that would beat logic, if not reality. It is in this context that the proposed safe harbour rules can play a significant part by proposing a reasonable window for risk adjustments.

Advance Pricing Agreement

It is also felt that a comprehensive and independent training programme for the revenue authorities to comprehend the nuances of transfer pricing would assist in minimising bizarre transfer pricing orders.

Tax-payers have the option of going in for an Advance Pricing Agreement (APA) with the tax authorities. An APA is an agreement between the a tax-payer and the tax authority concerning the transfer pricing method and the rate applicable to the tax-payers’ inter-company transactions, and normally covers multiple years.

Once an APA is in place, the tax authority cannot make arbitrary adjustments to the transfer price, as long as the APA is valid.

It is apparent that the revenue authorities would fix the rate under the APA, keeping the tenure of the APA in mind, so that future tax revenue is not lost.

Since the tax-payer and the revenue authority look upon each other with a certain degree of suspicion these days, the tax-payer would probably wait for the safe harbour provisions to be announced before entering into an APA. Consequently, the need to create safe harbour provisions that are safe to both and will stand the test of time becomes critical.

(The author is a Bangalore-based chartered accountant.)

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