Safe Harbour Rules

Recent Amendment to Financial transaction and Operating Income / Expense definition

The CBDT issued a notification on 19 December 2023 amending the existing safe harbour rules applicable from FY 2023-24. The alert captures in detail the amendments to the existing Safe Harbour Rules which include:

1) For foreign currency denominated loans, transition from LIBOR to Alternate Reference Rate (ARR). Currently 6 prominent ARR have be provided for the respective currency viz., SOFR (USD), EURIBOR (EUR), SONIA (GBP), TORF (Yen), BBSW (AUD) and SORA (SGD)

2) Extending the coverage of Safe Harbour to all associated enterprise, which is currently eligible for loan advanced to wholly owned subsidiary.

3) Removal of ceiling for loans advanced denominated in foreign currency. Introduction of slabs for the spread over the ARR based on the quantum loans advanced i.e., upto INR 250 crores and greater than INR 250 crs.

4) Credit rating defined to mean ratings obtained from an agency approved by SEBI and accredited by RBI. Further in case of multiple credit ratings, the lowest to be considered for the purpose of Safe Harbour rules.

5) For loan advanced to associated enterprises to be eligible under Safe Harbour, existing condition on sourcing of loan in INR has been removed.

6) Definition of operating income and operating expense amended w.r.t profit / loss on transfer of assets. As per the amendment, where depreciation on the transferred asset is included in operating expense, the profit or loss arising on account of such transfer will also be treated as operating in nature.

With these welcome amendments, the scope of covered transaction under the safe harbour has increased and businesses can consider opting under the Safe Harbour route to effectively and efficiently manage their transfer pricing dispute resolution.

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OECD issues Amount B report

The OECD issued the final report on Amount B on 19 Feb 2024. These rules will form part of the OECD transfer pricing guidelines and has been rechristened as the simplified and streamlined approach (the approach), instead of Amount B.

The approach is applicable for wholesale buy-sell marketing & distribution transactions and sales agency and commissionaire transactions. Exclusions are non-tangible goods, services and commodities.

Key aspects of the report are:

1. Jurisdictions to decide on implementation of the approach in their respective tax regime. Jurisdictions can include the approach in their tax legislation either in an elective manner or perspective manner
2. It is largely based on the public consultation document issued in July 2023.
3. The arm’s length consideration in the approach is not to be considered as a floor or ceiling for distribution activities in general.
4. India has made several reservations across the report, including not supporting the approach if qualitative criteria is not included.
5. Scoping criteria – can be tested using one-sided tp methods and quantitative filters – operating expenses over net sales.
6. Arm’s length consideration arrived through pricing matrix, operating expense cross-check and country risk adjustment.

The finalization of the approach is a landmark development in the direction of dispute resolution as it is a consensus document by the G20 inclusive framework. Wide adoption of the approach by jurisdictions can provide tax relief to MNC groups w.r.t. protracted litigation for baseline distribution activities.

The detailed analysis of the report is captured in the attached VSTN alert.

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KSA – APA Program

The introduction of the APA program comes as a silver lining to the KSA Transfer Pricing tax regime. This welcome move demonstrates the proactiveness of the KSA Government in fostering a non- adversarial transfer pricing environment and providing tax certainty to MNEs in relation to their related party transactions. On May 19, 2024, ZATCA commenced receiving applications for Unilateral Advance Pricing Agreements from taxpayers and Zakat payers. While the comprehensive guidelines in this regard is yet to be rolled out by ZATCA, some of the key aspects of the KSA APA program as laid down in the amended TP Bylaws and the recent notification inviting applications for Unilateral APAs are brought here below-

A. Applicability
– Applicable to Taxpayers and Zakat Payers
– Applicable from Financial year beginning on or after January 01, 2024

B. Eligibility
– Transaction Threshold: In order to apply for APA, the value of transactions with related parties shall not be less than SAR 100 million.(~26.66 million USD).
– Timing of Application: The taxpayer/ zakat payer would be required to submit the completed application at least 12 months before the start of the first financial year covered by the agreement.

C. Type of APA
– As of now only applications for Unilateral APA are received by ZATCA. Further guidelines from ZATCA on the APA program is expected to provide more clarity on Bilateral and Multilateral APAs.

This alert summarizes the critical aspects of the KSA APA program and also provides an overview of the general APA process with an intent to familiarize businesses and keep them abreast of the upcoming changes

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