Safe Harbour for Low Value Added Intra-Group Services – A beacon of hope?

June 15,2017
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Suchint Majmudar (Partner, BMR &Associates LLP)

Lalit Attal (Director, BMR &Associates LLP)

Elvira Misquith (Senior Associate, BMR &Associates LLP)

Introduction

Intra-group Services (IGS) has been the subject matter of a great deal of controversy between the Multi National Enterprises (MNE) taxpayers and the Indian Revenue Authorities (IRA). There are increased instances of cross border IGS with globalization as centralised services help streamline business operations and achieve economies. The practical difficulties faced by MNEs to substantiate the cost allocated by the overseas parent company/ associated enterprise (AE) is compounded by the lack of regulations and guidance by the Indian tax administration on this contentious issue. In what can be seen as a panacea to the afore mentioned predicament, the Central Board of Direct Taxes (CBDT) issued amended safe harbour rules (SHR)[1] on 7 June 2017, whereby a new eligible international transaction i.e. receipt of Low Value Added IGS (LVA IGS) was introduced. As per the newly amended SHR, the entire value of the LVA IGS including a mark-up of 5 per cent should not exceed a sum of INR 100 Million.

Interplay between OECD and Indian tax laws

The definition of LVA IGS and the SHR for LVA IGS introduced by the IRA is influenced by the Organisation for Economic Co-operation and Development (OECD) Action Plan 8 to 10 on Base Erosion and Profit Shifting ‘Aligning transfer pricing outcomes with value creation’ (AP). The AP lays down extensive guidance on dealing with matters relating to LVA IGS. It defines LVA IGS as services performed by one member or more than one member of an MNE group on behalf of one or more other group members which[2] (the same has also been incorporated by the IRA):

  • Are of a supportive nature;
  • Are not part of the core business of the MNE group (i.e. not creating the profit-earning activities or contributing to economically significant activities of the MNE group);
  • Do not require the use of unique and valuable intangibles and do not lead to the creation of unique and valuable intangibles; and
  • Do not involve the assumption or control of substantial or significant risk by the service provider and do not give rise to the creation of significant risk for the service provider.

The AP advocates a simplified approach to the determination of the arm’s length price (ALP), which would help reduce the compliance effort of meeting the benefit test, provide greater certainty for MNE groups that the price charged for the qualifying activities will be accepted by the tax administrations and provide tax administrations with targeted documentation enabling efficient review of compliance risks[3]. A mark-up of upto 5 percent has been recommended by the OECD on the provision of LVA IGS and adopted by the SHR.

Indian TP audit experience and judicial precedents

The Indian Income-tax rules and regulations do not lay down any guidelines for the tax administration on dealing with the aspect of LVA IGS.

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