Draft Income Tax Rules – Update on Safe Harbour Rules

1) Provision of IT services*; 2) Others: – Provision of contract R&D services wholly or partly relating to generic pharmaceutical drugs – Manufacturing & export of core auto components – Manufacturing & export of non-core auto components – Provision of data centre services (NEW) – Advancing intra-group loans by eligible assessee – Providing corporate guarantee by eligible assessee – Receipt of low value-adding intra-group services

*Common category for Software development, ITeS, KPO & Contract R&D in relation to software development

Changes in Form No.49

Hence, the new form outlines the mandatory deduction and set-off restrictions applicable when opting for SH for EB. These restrictive provisions are designed to ensure that the profit% of 4%/2% is final, preventing taxpayers from further reducing their taxable income through additional claims

New Rule 91 on SH procedure for IT services

A separate, simplified rule has now been introduced exclusively for the SH procedure relating to IT services. Under the earlier framework, the procedural requirements for all eligible international transactions were consolidated within a single rule, without distinction between different categories. The new structure therefore streamlines compliance by carving out a dedicated procedure specifically for IT services, as promised by the 2026 Budget. The key provisions are outlined below:

1. Duration

• Once exercised validly, the SH remains in force for 5 consecutive tax years.
• If an Assessee withdraws their option (by furnishing a declaration), they cannot re-exercise it until the original 5-year period expires.

2. Application filing

• Form No. 49 to be submitted and verified electronically (Digital Signature or EVC) to the DGIT (Systems).
• Must be filed during the first tax year and not beyond 30th June of the following year

3. Automated verification & approval process

• The system verifies if the assessee and transactions are ‘eligible’ and the option is valid.
• Acceptance or rejection will be communicated within two months from the end of the filing month.
• Application will be rejected only upon providing specific reasons and after giving an opportunity to the assessee to rectify any identified defects.

4. Annual compliance

• For each of the four years following the first year, a statement detailing quantum of eligible transactions and profit margins achieved must be filed before filing the tax return (Format of the statement yet to be specified).
• Upon acceptance, the assessee must file tax returns for each of the 5 years as per SH provisions on or before the due date for filing return of income
• The Assessing Officer can make reference to the TPO for transactions other than the eligible IT services covered by the SH.

Further it is specified that the DGIT (Systems) with the approval of CBDT can lay down any further data structure, formats or procedures in connection with furnishing/verification of the above documents, including any required modifications.

For an assessee to qualify as an eligible assessee in respect of IT services, the conditions relating to assumption of only insignificant risks and the foreign principal performing the economically significant functions will continue to apply. In this context, actual conduct takes precedence over contractual terms.

The responsibility to determine whether an assessee is an eligible assessee, bearing insignificant risk, for contract R&D lies with AO or TPO or DGIT (systems) whereas it has been shifted from AO/TPO to DGIT (Systems) for software development, ITeS & KPO services.

Note: As the new category of Data center services are not covered under the provision of IT services, one has to follow the general procedures relating to the other eligible transactions, which involve verification of the SH Application by tax authorities.

Relaxation in Accountant definition

To support the government’s vision of home-grown accounting and advisory firms to become global leaders, the definition of Accountant for the purposes of SH Rules has been rationalised, as announced in the Budget. The definition of Accountant is relied in the SH Rules only in connection with the management services safe harbor, for certification of the cost pool. The earlier rule provided a preference to Global firms for the certification as it requires the firm certifying the same to be present in more than 2 countries.

Currently the requirement to have presence in more than two countries has been removed for Indian Chartered Accountants who are members or partners in accountancy or valuation services entities. This condition is now applicable only in the case of persons recognised for undertaking cost certification by the Government of the country where the associated enterprise is registered or incorporated or any of its agencies.

Further the revenue threshold to be fulfilled by an Accountant has been relaxed:

• Accountant pursuing the profession of accountancy individually or is a valuer – Annual professional receipts in the year preceding the year in which cost certification is undertaken > INR 50 lakhs (Old rule- Rs. 1 crore);
• Member or partner in an accountancy or valuation services entity – Annual receipt of the entity in the year preceding the year in which cost certification is undertaken > INR 3 crores (Old rule- Rs. 10 crores).

2026-27 and shall continue to apply for subsequent block periods, unless modified. However, for transactions other than IT services, the SH application in Form No. 49 will still need to be filed for each individual year.

Further, with updates to the SH Rules as per Budget 2026, the corresponding changes have been incorporated in the SH rates in the draft Rules:

New / Updated definitions

The following definitions have been included in connection with SH in the new Rules:

Data centre and Data centre services, Contract manufacturer, Custom bonded area, Eligible assessee, Eligible business, Gross receipts and Specified electronic goods in connection with the business activity of storage of components in a warehouse in a custom bonded area for sale to a contract manufacturer.

Key considerations

More clarity is needed on whether SH for IT services can be opted for a period shorter than five years, or if only a continuous 5 year term is permitted. More guidance is also required on whether, if the assessee withdraws from the Safe Harbour regime for IT services during the 5 year period, such withdrawal will have retrospective effect or apply only prospectively to future years. As the cost allocation certificate for low value-adding services must be filed together with the SH form, it should be obtained in advance. Timely coordination with the AE’s location will be required to obtain the certificate. Under the current and prior SH Rules, five factors must be assessed to determine whether an Assessee qualifies as an eligible Assessee with insignificant risk. It remains to be seen how this will be implemented in practice, in the case of IT service providers where the verification process has now become automated.

KSA Transfer Pricing Flyer Overview of TP compliances

Kingdon of Saudi Arabia had introduced transfer pricing Bylaws in the year 2019. The Bylaws were constantly updated to include more persons under the purview of transfer pricing regulations of KSA from time to time aligned with the OECD guidelines. The Bylaws lays down the detailed guidance on the applicability, covered persons, covered transactions and approach for determining arm’s length criteria of the controlled transactions, a framework to set prices for Controlled Transactions, including but not limited to transfers of goods, services, loans and Intangibles (intellectual property). Besides loans, other financial transactions are also covered in this Guideline, for instance, guarantees, factoring and hedging

The following persons are covered under the TP Bylaws of the KSA covering both the domestic and cross border transactions:

• Taxpayers subject to 100% income tax
• Mixed Companies to the extent that the Mixed Company is subject to income tax in the Kingdom.
• 100% Zakat Payers
• Small Enterprises, investment funds, and wholly government – owned companies that are exempt from Zakat collection

Identify of Related Persons

Related persons means two or more natural persons having relation or partnership

A natural person is related to juridical person in case of either him or his related person together exercises controls (directly or indirectly or both) voting rights income or capital of a company or partnership or juridical person Two juridical persons are related when there is a common control on them, one controls the other or the persons having effective control over them are related

Identification and delineation of controlled transactions

• Broad- based analyses including the industry sector and other relevant items of the MNE Group such as business strategies, supply chain and key functions assets and risks
• In depth- analysis including the determine the contractual terms of the Transaction; Functional and Risk Analysis for each Related Person part of the Controlled Transaction; Characteristics of the property transferred, or services provided; The economic circumstances of the market in which the Related Persons operate; and the Business strategies pursued by the Related Persons
• Determination of most appropriate method and its application to determine the uncontrolled transactions

Documentation

In general, the KSA transfer pricing guidelines and Bylaws impose four documentation requirements i.e., Disclosure Form and Affidavit, General documentation, Local File, Master File and Country- by- Country Report

Implementation

• Reporting of the Controlled Transactions in the commercial accounts based on the existing accounting rules in the KSA
• Making Periodical adjustments and year- end adjustments before filing the tax return as all Controlled Transactions must be reported in the Disclosure Form and the tax returns in accordance with the Arm’s Length Principle
• KSA will only allow a downward corresponding adjustment if there is a DTA in place

Local File provides detailed information on Controlled Transaction with the Taxable Person and is, accordingly, supplementary to the Master File. The information required under Local File is consistent with the OECD guidelines

CbCR Notification Form: Every Taxpayer who is a Constituent Entity of an MNE Group must submit to the Authority a CbCR Notification (part of Tax/Zakat Return) no later than 120 days after the last day of the Taxpayer’s Reporting Year. The CbCR Notification must include information on the identity of the Reporting Entity of the MNE Group, its country of tax resident and the country in which the Reporting Entity submits the CbCR

TP Disclosure Form: The Disclosure Form of Controlled Transactions is used by the Authority to conduct a high level Transfer Pricing Risk Assessment. Additional information supporting the Transfer Pricing position taken may be requested by the Authority

Master File provides an overview of the MNE’s global business, the Transfer Pricing Policy and economic activities/ functions of the Related Persons. The information required under Master File is consistent with the OECD guidelines

CA Affidavit: If Sections 1 (the Disclosure Form) and Section 2 (the CbCR Notification Form) are completed accurately, the Taxpayer must attach the Chartered Accountant Certificate declaring that the Transfer Pricing policy of the MNE Group is consistently applied in relation to the Taxpayer in the KSA. With respect to the Chartered Accountant Certificate, GAZT accepts both “limited” and “reasonable” assurance engagements (as endorsed by Standing Committee on Public Accounts) as long as the certificate is provided by a licensed auditor in KSA

Country- by- Country report includes Tax Jurisdiction- wide information on various information relating to the MNE’s global activities: In principle, the Ultimate Parent Entity (UPE) or Surrogate Parent Entity (SPE) should submit the CbCR

General TP Documentation: Applicable to all the taxpayers having controlled transactions where TP Bylaws apply. No specific requirements prescribed and therefore applies a format- free approach. Generally, most information listed in the Bylaws under the Master File and Local File should be documented, including in particular a Functional Analysis and an economic analysis.

The Authority may direct any Person (as listed in the Bylaws) to prepare and maintain documentation related to Controlled Transactions and to request such Person to provide such documentation within the time which shall in all cases be no less than Thirty (30) days from the date of the Authority’s request

Key Features of RHQ

• Valid License & Permitted Activities: Must have valid license and the activities covered under such license. The main activities of the RHQ are restricted to strengthening the group’s profile in the region, providing strategic supervision, administrative guidance and support for the internal business of the Company, subsidiaries, and other related companies. Optional activities such as sales and marketing. RHQ should earn income from only the above activities and must incur operational expenditure in relation to its activities. Related persons shall have the same meaning as the TP Bylaws of KSA
• Tax Benefits: Zero percent income tax and zero percent withholding tax for 30 years.
• Personnel Requirements: Must have at least one resident director in RHQ. Must employ adequate employees with adequate qualification and skill set to conduct such activities
• Accounting & Reporting : Must prepare and maintain the books of accounts for each full and partial tax years and file the tax returns and Zakat Returns
• Transfer Pricing Compliance: RHQ must comply with Transfer Pricing Bylaws of KSA and must ensure all the transactions with related persons are conducted at arm’s length
• Authority Oversight & Ruling Requests: The Authority has powers to carry out the audit, call for any information and monitor the fulfilment of economic substance in respect of RHQ in accordance with the procedures and provisions outlined in the relevant Tax and Zakat laws. RHQ may submit a request for a Ruling to the Tax authorities to provide interpretation and clarifications on tax rules and Bylaws
• Penalties: Penalties outlined in the Tax and Zakat laws apply to RHQ

Transfer Pricing Considerations

• Functions, Assets & Risk (FAR) Analysis: Conducting a detailed Functions, Assets and Risk analysis to support the licensed activities of RHQ
• Transfer Pricing Method Selection: Evaluation of the most appropriate method to commensurate with the key licensed activities of RHQ
• Intercompany Agreement vs. Conduct Analysis: Thorough analysis of the terms of the intercompany agreements vis-a-vis conduct of the parties to substantiate economic substance
• Controlled Transaction Evaluation: Evaluate controlled transactions to identify the deviations from the eligible income and expenditures of the RHQ
• Periodic & Year-End Adjustments: Thorough periodical and year-end adjustments to meet the arm’s length principle requirements
• Extensive Documentation: Maintain extensive documentation in relation to the above to substantiate the arm’s length nature of the controlled transactions
• Compliance with Bylaws: Meet the robust documentation requirements as per the Bylaws to avoid penal consequences

The KSA has not implemented the global minimum tax and qualifying domestic minimum tax pursuant to OECD pillar 2

Highlights of APA Program

• APAs can be requested for related party transactions with a minimum value of SAR 100,000,000. Exemption to certain complex transactions from this threshold can be granted by the governor
• A comprehensive application must be submitted at least 12 months before the first financial year covered by the APA
• The duration of the APA is three years
• Currently, there are no fees associated with the application for the APA
• Annual Compliance Report is to be submitted annually during the period covered by the APA

Benefits of APA Mechanism

• Managing TP risks
• Achieve tax certainty and
• Minimize the potential for disputes with the tax authority

A tailored approach considering the industry and operations of the taxpayers of the KSA

• Timely analysis on applicability of the Bylaws including amendments and updates
• Evaluation of existing transfer pricing policies and intercompany agreement to identify the risks and frame mitigation strategies
• Periodic monitoring and evaluation of the controlled transactions to advise on the arm’s length requirements
• End to end assistance in Annual TP Compliance
• Upfront advise on future transactions including evaluation of APA and Rulings as an option

Specific Support to RHQ

• Detailed documentation with FAR analysis Analysis of Cost- Plus Vs Profit Split Framing the risk mitigation strategies for RHQ in addition to the annual compliance
• Evaluation of Pillar 2 implications in case RHQs and Special Economic Zones for inbound MNCs which have IIR implemented