Finance Minister Nirmala Sitharaman, on February 1 proposed to provide transfer pricing provisions for arm’s length price determination in relation to similar transactions to be applicable for a period of three years, a move that is expected to boost Global Capability Centres (GCCs) and MNC service providers.
Transfer pricing refers to the pricing of cross-border transactions between two related entities and is one of the most disputed areas in international taxation.
Additionally, the finance minister also spoke about safe harbour rules to minimise transfer pricing disputes. To reduce litigation and provide certainty in international taxation, the scope of safe harbour rules is being expanded.
“To streamline the process of transfer pricing and to provide an alternative to yearly examination, I propose to introduce a scheme for determining arm's length price of international transaction for a block period of three years. This will be in line with global best practices,” Sitharaman said presenting the Budget 2025.
Pareekh Jain, CEO of Pareekh Consulting and EIIRTrend, said transfer pricing rationalisation will benefit Global Capability Centres (GCCs) and Multi-National Corporations (MNC) service providers and provide clarity and certainty about tax. "For Indian service providers, the clarity can help in minimising tax disputes... some service providers got tax notices for transactions between foreign and Indian subsidiaries," Jain told Moneycontrol.
On February 28, the Economic Survey said expanding the scope of safe harbour rules and streamlining transfer pricing assessment procedures are expected to make the country’s transfer pricing regime more attractive and competitive, boost IT exports, and ease business for GCCs and the IT services industry.
The proposal to conduct transfer pricing assessments for a block of three years promises a less burdensome process. Nonetheless, practical implementation details remain to be clarified, Ashwin Vishwanathan, Tax Partner, EY India, told Moneycontrol.
"The Economic Survey highlighted the need for improved tax certainty and stability, particularly in matters such as Advance Pricing Agreements (APAs). Expanding the safe harbour regime is expected to provide greater certainty, boost the investment climate, and alleviate the burden on APAs. The new income tax bill, set to be introduced next week, will be closely watched," Vishwanathan added.
The Union Budget 2025 also marks a significant step forward for GCCs with the expansion of safe harbor rules and a structured approach to determining arm’s length pricing for international transactions, says Vikram Ahuja, co-founder of ANSR.
"This move is set to create a more predictable and efficient regulatory environment, reducing compliance complexities and minimising litigation risks," Ahuja said.
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