As many multinational enterprises with operations in India have learned the hard way, India is one of the most aggressive and active tax jurisdictions in the world when it comes to transfer pricing compliance and controversy. Wary of cost-plus service centers set up by multinational enterprises (MNEs) for local specialization and labor cost savings, the Indian Revenue Service for decades demanded some of the highest markups seen in the transfer pricing world - often exceeding 30% for some higher-value services.
India some years back introduced "safe harbor" rates for an array of common services provided by Indian members of MNE groups, ranging from IT enabled services to contract R&D. Despite its stated intention of simplification, the safe harbor regime proved difficult to apply for a number of reasons. For example:
- Differential markups for each type of service, which were often poorly delineated and hard to reconcile with arm's length pricing on the other side of the transaction.
- Low maximum transaction amounts, preventing eligibility for larger MNEs with the most to gain from the regime.
- Confusing and subjective election requirements, including the need to re-apply for the safe harbor annually.
As a result, adoption remained relatively low and transfer pricing controversy continued to resemble a hostage negotiation, except with none of the refreshing clarity of a ransom note.
Hope for reform reemerged on February 1, when, in the annual Union Budget Speech, the Indian Minister of Finance laid out several welcome changes to the safe harbor regime, including:
- A unified (and reduced) safe harbor margin across all major covered service categories of 15.5%.
- An increase in the maximum transaction threshold amount to ₹2,000 crore (appx. USD 220M).
- Automated, rules based approval for safe harbor election, with lock-in certainty for up to five years.
Other relevant provisions in the Union Budget include a 15% safe harbor for certain data center services and an expedited 2-year target for concluding unilateral advance pricing agreements.
These new rules are set to take effect at on April 1, 2026, the beginning of the next Indian fiscal year. As this April Fool's Day, perhaps taxpayer revelry should be reserved for evidence of successful roll-out.
That said, we at Eide Bailly are strongly advising our clients with India captive service arrangements to plan for earliest possible adoption, with many projects already underway. If reality matches ambition, the new rules provide a rare opportunity for administrative untangling and tax certainly in an otherwise confounding tax jurisdiction.
Reach out to Eide Bailly today for a discussion on whether the new safe harbor rules might benefit your business!
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