Software and business process outsourcing companies that opt for the safe harbour route will now have to pay tax on a minimum 17 percent operating profit margin, if their turnover is under Rs 100 crore, and 18 percent if their turnover is between Rs 100 crore and Rs 200 crore. Earlier, they had to pay tax on 20 and 22 percent, respectively.
R&D; companies operating in the IT, ITes and pharma space, among others, will be taxed on a minimum operating profit margin of 24 percent, down from 30 percent earlier.
Rahul Mitra, partner and head of transfer pricing and base erosion and profit shifting at KPMG, said that the number is still high, but given that the safe harbour route, which was earlier open ended, is now restricted to companies with a turnover of Rs 200 crore or less, the expectation is that bigger companies could be taxed lower under APA or normal assessment since the minimum operating profit arrived at under the safe harbour route is usually a premium number.
Minimum profit for knowledge process outsourcing companies will be determined on an employee costs-to-operating costs ratio under three slabs. A profit margin of 18 percent will be applicable to companies where employee costs are less than 40 percent of operating costs; if the costs are between 40 and 60 percent, the number jumps to 21 percent and for over 60 percent, the profit margin will be 24 percent.
Additionally, low value-added services such as business support services provided by the parent companies to Indian subsidiaries will not be scrutinised under the new rules, provided that the company can submit certified documentation from a chartered accountant that the value of the transaction is not in excess of Rs 10 crore.
Overall, this is a good move by the government. There were no takers for the safe harbour route in 2013 because the numbers were on the higher side. The moderation of these rates will encourage smaller companies with turnover of less than Rs 200 crore to take this route.
Rahul Mitra, Partner and Head-Transfer Pricing and Base Erosion and Profit Shifting, KPMG
Kunj Vaidya, national leader, transfer pricing at Price Waterhouse and Co., said that the rules for the IT and ITeS services companies have been rationalised and are largely aligned to the outcomes experienced in unilateral APAs. This should provide significant relief to small- to medium-sized companies and and it’s possible that some companies with pending APA cases would opt for the safe harbour route, he said
News Source- BloombergQuint