Safe Harbour Rules for intra-group services - Analyzing the fine-print

June 14,2017
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Akshay Kenkre (Partner, TransPrice)

Globally service-oriented transactions account for more than 60% share in international trade. Service often classified as intangible in nature, is hard to evaluate and measure from a transaction perspective. This means, intangible benefits enjoyed by the service recipient often go unnoticed and the transfer pricing compliance and burden involved could be a challenge in many circumstances. This challenge could be from a perspective of the taxpayer as well as from the point of view of tax authorities. Therefore, there was a need felt globally to resolve such a challenge to ease off pressure from the taxpayer and tax authorities for evaluation of service transactions. Consequently, it is worthwhile to focus on high value intra corporate transactions rather than accounting for every minute penny in the group transaction. Such an approach to simplicity was considered by the OECD while addressing the 15 BEPS action points, with specific reference to transfer pricing implementation models which forms a part of Action 8-10 of the BEPS Action Plans.

The OECD and G20 felt the need to simplify transfer pricing rules in respect of low value-adding intra-group services to safeguard payments such as management fees and head office expenses that have been subject to base erosion in the service recipient country. Low value-adding services refer to the support services which are not part of the core business of the MNE group. To reduce the overall transfer pricing compliance of intra-group services, few categories subject to a threshold were considered for a simplified approach for transfer pricing analysis. Such category was then defined in Chapter VII of the Transfer Pricing Guidelines under OECD BEPS Action 10 as ‘low value-adding intra-group services’.

Amended Safe Harbour rules: CBDT vide Notification 46 dated 7 June 2017, recently amended Indian safe harbour rules in transfer pricing for international transactions, and has notified the rules on the lines of the guidance laid out by OECD and G20 BEPS Action points. To optimise the wide net of transfer pricing issues involved in intra-group services, a new category of international transaction called ‘low value-adding intra-group services’ from a cost perspective for Indian company has been included in the notified rules. According to the new category, a service provider (foreign AE) shall apply a mark-up to the costs separately identified in providing the low value-added services to service recipients of an MNE group. This mark-up should command a limited profit mark-up, not exceeding 5%. However, in a bid to reduce taxpayer’s transfer pricing documentation, the mark-up does not need to be justified by a benchmarking study.

The amended rules notify that the low value-added intra-group services shall be subject to a threshold limit of INR 10 crore.

However, it is to be noted that although no documentation needs to be maintained for the mark up charged by the foreign AE, the cost base of the foreign AE allocated to the Indian operations would need to be justified. Such justification includes a certificate from an Accountant regarding the method of cost pooling, exclusion of shareholder costs and duplicate costs from the cost pool and the reasonableness of the allocation keys used for allocation keys used for allocation of costs to the assessee by the foreign AE.

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