Safe harbour across world’s major economies

An increasing number of countries are introducing safe harbour mechanisms. This is a significant convenience for taxpayers in settlements with related parties.

Among the world’s largest economies, these regulations are in place in the US, India, South Korea, Russia, Australia, Spain, Mexico, Austria or the Netherlands.

Most jurisdictions have chosen to adopt safe harbour solutions for loans. Nevertheless, countries are increasingly choosing to extend the solution to cover low-value-added services transactions.

In Poland, the safe harbour mechanism applies to both loans and low-value-added services.

In the case of loans, tax authorities waive the determination of the taxpayer’s income (loss) in terms of the amount of interest on the loan, if the conditions specified in the law are jointly met (e.g. the relevant interest rate as specified in the announcement of the Minister of Finance or the principal and term of the loan).

In the case of low-value-added services, among others these transactions are considered arm’s length:

• where the cost mark-up of no more than 5% of costs has been established for the acquisition of services/no less than 5% of costs for the provision of services,
• where the service provider is not seated in a tax haven,
• for which the entity holds an appropriate detailed calculation and description of the transaction, together with a functional analysis.

Examples of such services: administrative support, accounting or marketing services. Please note these services should be supporting the business operations of the service recipient. They cannot be the core business of the group of related entities.

We have outlined the principles and listed examples of how these rules are applied in some of the world’s largest economies.

Safe harbour mechanism in the US

The safe harbour mechanism has been introduced for low-margin covered services to a similar extent as in Poland. These services (the low margin covered services) are intra-group service transactions for which the median of comparable mark-up on the total cost of services is less than or equal to 7%. The mechanism cannot be applied to financial or insurance transactions. An example of low-value-added services in US regulations is data verification services.

Example 1:

Company P, Company Q and Company R are manufacturers of industrial goods. Company P’s accounting department periodically reviews Company P’s, Company Q’s and Company R’s accounts payable information and identifies any inaccuracies in the records, such as double payments and double debits.

Given the information on the operations of companies P, Q and R, the taxpayer could reasonably conclude that these services do not materially contribute to the group of entities’ core competitive advantages, core capabilities or core risks for the success or failure of the group’s business. If these services meet the remaining requirements (e.g. no exclusions due to the subject matter of the business), company P would be able to charge these services to company Q and company R in accordance with the safe harbour mechanism.

Safe harbour mechanism in India

India has introduced a safe harbour mechanism for the purchase of low-value-added intra-group services. Under the rule, the payment of a mark-up of at most 5% on the relevant costs, incurred by the service provider, is covered by the safe harbour. The condition is that the total value of the transaction, including the mark-up, must not exceed INR 100 million in a given fiscal year.

Safe harbour mechanism in Austria

According to the new Austrian guidelines, as of 2022, a mark-up of between 3% and 10% (most commonly 5%) can be applied to services of a routine nature in intra-group transactions. Having applied this mark-up, you are released from the obligation to prepare a benchmarking analysis.

Safe harbour mechanism in the Netherlands

The safe harbour mechanism is also available to taxpayers in the Netherlands. A 5% mark-up on low-value-added services transactions is considered arm’s length. The following example comes from Dutch regulations:

Example 2:

Help desk only deals with questions from staff of various group entities regarding the operation of the computer system, the software used and resolves minor user problems. Based on the nature of the business, its scale and added value, the taxpayer concludes that the helpdesk services are not the group’s core business. It also argues that these services add negligible value to the core business. In this case, it is sufficient to transfer all relevant actual costs with a profit mark-up of 5%.

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Contact us if you have any doubts about how to apply the safe harbour mechanism. We will be happy to help you with the matter.