Background of Safe Harbour: Tax payers often need to carry out complex transfer pricing analysis of their related party cross border transactions. Compelled to allocate resources for preparing detailed documentation, companies are thus burdened with significant costs associated with undertaking such an exercise. Moreover, transfer pricing analysis being a subjective exercise, may be viewed in different ways. The factual nature of transfer pricing determinations can be an extremely complex subject that frequently vexes both taxpayers and tax administrations alike. In the understandable desire to find bright line rules that do not require the exercise of judgment and analysis, it is often proposed that "safe harbors" be provided.

Even OECD recognizes that applying the arm's length principle can be a fact-intensive process and uncertainty associated with it may impose a heavy administrative burden on taxpayers and tax administrations that can be aggravated by both legislative and compliance complexity. These facts have led a number of countries to consider whether transfer pricing safe harbors rules would be appropriate in the transfer pricing arena. The theory of a safe harbor is that the burdens imposed in applying the arm's length principle may be ameliorated by providing circumstances in which taxpayers could follow a simple set of rules under which a national tax administration would automatically accept transfer prices. In taxation contexts, the safe harbor concept typically refers to a statutory provision that applies to a given category of taxpayers and by substituting exceptional, usually simpler obligations, relieves eligible taxpayers from certain obligations that the tax code otherwise imposes. In effect, a safe harbor is a defined parameter. If the transfer pricing result falls within that parameter, tax administrations would not be allowed to make an adjustment. Hence, transfer pricing safe harbour rules would need to be designed to achieve the following objectives:

• Compliance relief:

• Certainty
• Administrative simplicity

The Finance (No 2) Act (FA), 2009 introduced provisions in the Indian Income-tax Law (ITL) that empowered the Central Board of Direct Taxes (CBDT), the apex Indian Tax Administration, to issue transfer pricing “safe harbor” rules. A “safe harbor” is defined in the ITL as circumstances in which the Tax Authority shall accept the transfer price declared by the taxpayer. The CBDT on 14 August 2013 released draft safe harbor rules for public comments. After considering comments of various stake holders, on 18 September 2013, the CBDT issued the final safe harbor rules.

The rules provide minimum operating profit margins in relation to operating expenses a taxpayer is expected to earn for certain categories of international transactions, such as provision of software development services, information technology enabled services, (ITES), knowledge process outsourcing (KPO) services, contract research and development (R&D) services, manufacture and export of automotive components etc. that will be acceptable to the Tax Authority. The rules also provide acceptable norms for certain categories of financial transactions such as intra-group loans made or guarantees provided to nonresident affiliates of an Indian taxpayer.

The transfer price contained in the safe harbor rules shall be applicable for five years beginning from financial year (FY) 2012-13. The safe harbor rules, optional for a taxpayer, contain the conditions and circumstances under which the norms/marginswould be accepted by the Tax Authority and the related compliance obligations. The taxpayer has flexibility in electing the years to be governed by the safe harbor rules within the five year period. Where a taxpayer’s transfer price is accepted by the Tax

Authority under the safe harbor rules, the taxpayer shall not be entitled to invoke the mutual agreement procedure (MAP) under an applicable tax treaty.

Implications:

• If safe harbour opted, taxpayer not entitled to make any comparability adjustments nor avail benefit of the prescribed variation.
• Taxpayer required to comply with TP documentation & Form 3CEB filing requirements even if they opt for the safe harbour rules.

• Form 3CEFA to be furnished for the initial year to exercise safe harbour option. Option exercised to remain in force for lesser of the period specified in Form 3CEFA or 5 years, unless option held to be invalid or taxpayer opts out.

• Relatively simplified audit process prescribed for taxpayers opting for safe harbour in respect of eligible transactions

• Ineligible to invoke MAP if taxpayer’s safe harbour option is accepted

APA vs Safe harbour rules:

Concluding Remarks:

The safe harbour program was intended to reduce the transfer pricing litigation and related compliances. However, the objective was not achieved because of the high margins prescribed for the various industries. Further, the APA program has been successful and the margins agreed in the APA programs have been much conducive and attractive to the taxpayers and thus the results followed. There are expectations from the government that they would shortly revisit the safe harbour and come out with a much better and tax friendly margins on par with the APA and the litigation results.

Introduction

In order to provide an opportunity to all persons, a new scheme, i.e., Income Declaration Scheme, 2016 (“Scheme”) has been introduced by the Finance Ministry which allows all persons who have not paid full taxes in the past to come forward and declare the undisclosed income and pay tax, surcharge and penalty. The amount of such tax, surcharge and penalty works out to 45 percent of such undisclosed income declared. 

Chapter IX has been introduced in the Income-tax Act, 961 (“Act”) for the Scheme and is named as ‘The Income Declaration Scheme, 2016’ consisting of sections 181 to section 199. The scheme has been introduced with effect from June 1^st2016 and will remain open up to the date to be notified by the Central Government in the Official Gazette which is September 30, 2016 (notified by the Central Government). 

The scheme is applicable in respect of undisclosed income for any Financial Year (“FY”) prior to FY 2016-17 (i.e., AY 2017-18). The Income Declaration Rules, 2016 has also been notified by the Central Board of Direct Taxes (“CBDT”) (on May 19, 2016) and has issued various explanatory notes and clarifications in the form of ‘Frequently asked questions’ (“FAQ”) for better compliance with the Scheme. 

Read more: Income Declaration Scheme, 2016

Key Topics Covered:

• International Taxation
• FEMA
• Audit
• Income Tax
• Companies Act, 2013
• Audit

Updates

• Direct Tax
• Indirect Tax
• Companies Act, 2013

This article is contributed by Partners of SBS and Company LLP - Chartered Accountant Company. You can be reached at This email address is being protected from spambots. You need JavaScript enabled to view it.

1.1  Introduction:

Profit potentiality, limited liability, tax benefits, free transferability would make investment in equity preferable, however there is other side to the coin in terms of high risk, market fluctuations which prudent investor should always consider.

Normal tendency of investors while making investments is to look at the track record of the Board of Directors, CEO and management team along with company performance and risks adherent to such company and industry. In spite of those measures, history revealed so many scandals, Inspite of impressive track record of the Board of Directors and CEO,investors lost their money, Enron scandal would be prompt evident supported by ZZZZ Best Inc, Centennial Technologies Inc, Bre-X Minerals, Worldcom and many other scams.

It is evident that, apart from the mentioned measures, an investor should also consider how risks are managed in the company, strength of its control environment and its effectivegovernance to make better decisions.

What shall an investor consider can know easily, but how? is a million-dollar dividend question.

Through this article I made an endeavour, how an Internal Audit system is relevant for investors while making investment decisions.

24| P a g e

SBS Wiki                                                                                                                                                       www.sbsandco.com/wiki

2.1  Relevance of Effective Internal Audit

Though internal audit doesn’t assure any commercial success, effective internal audit in an organisation assures good governance. It provides the management and stakeholders with an independent view on organisation’s risk and control environment.

Many stock exchanges across the world recognised the importance of internal audit, they made mandatory for the listed companies to have internal audit in place. In India as per the clause 49 of listing agreement, every listed company should possess internal audit mechanism, same requirement is also there in Companies Act,2013. As per section 138 of Indian Companies Act 2013 read with Rule 13 of Companies (Accounts) Rules, 2014, appointment of internal auditor is mandatory for every listed company in India.

One of the surveys conducted by ACCA (the Association of Chartered Certified Accountants) found that more than 85% of respondents felt that the provisionof non-financial information (such as corporate governance practices and corporate social responsibility issues) would serve their (investment) decision making purposes and audit brought value for their decision making.

As described by IIA, “Internal audit is a key pillar of good governance. It provides the board of directors, the audit committee, the chief executive officer, senior executives and stakeholders with an independent view on whether the organisation has an appropriate risk and control environment, whilst also acting as a catalyst for a strong risk and compliance culture within an organisation”.

Presence of effective internal audit system will always provide better insight into the company’s governance and risk mitigation, on the other way we may not.

2.2 Internal Audit Importance:

2.2.1 Introduction of internal audit standards, risk assessment procedures by internal auditors improved reliability on internal audit for external auditors to the notable extent. There were instances where internal audit analysis reports made external auditors to qualify their Audit Report.

“Well-controlled, well-managed organizations cost less to audit,”“Internal audit is a key part of a well-controlled, well-managed organization. Our coordination with internal audit is very helpful in making sure that the work we do is efficient.”

-Greg Weaver, chairman and chief executive officer at Deloitte &Touche.

25| P a g e

SBS Wiki                                                                                                                                                       www.sbsandco.com/wiki

2.2.2 Internal Audit can improve management and accountability, both financial and non–financial.Internal audit can be a pivotal activity to provide assurance to the board of directors, the audit committee, and the chief executive officer, and stakeholders that the organisation is governed effectively by

?Providingindependent, unbiased assessment of the operations of the organisation.

?Providingmanagement with information on the effectiveness of risk management, control and governance processes.

?Actingasa catalyst for improvement in risk management, control and governance processes.

?Informingmanagement what it needs to know, when it needs to know it.

3.0  Conclusion:

While making investment, apart from company growth, industry risk, management capabilities, Insight into the organisation’s risk mitigation, governance and ethical culture etch will always bring value advantage to investment decisions.

Though internal audit doesnot assure any commercial success, effective internal audit in an organisation assures good governance, provides insight into the organisation’s both financial and nonfinancial aspects which a prudent investor should always consider.