Safe harbor

In taxation, a safe harbour refers to a set of predefined criteria or thresholds established by tax authorities to simplify compliance and reduce disputes. When a taxpayer’s transactions or pricing arrangements fall within these prescribed limits, they are deemed acceptable and are not subjected to detailed examination or adjustment. In India, the safe harbour provisions under the Income Tax Act outline specific margins and parameters for transfer pricing. If a company’s international or specified domestic transactions meet these prescribed benchmarks, the tax authorities automatically accept them as being conducted at arm’s length, providing certainty and reducing the risk of litigation.

Example: An Indian IT services company may apply a safe harbor margin of a certain percentage on its operating profit. If its pricing falls within that range, the transfer pricing officer will not make further adjustments.