1. A legal provision to reduce or eliminate liability as long as good faith is demonstrated.
2. A form of shark repellent implemented by a target company acquiring a business that is so poorly regulated that the target itself is less attractive. In effect, this gives the target company a “safe harbour.”
3. An accounting method that avoids legal or tax regulations and allows for a simpler method (usually) of determining a tax consequence than those methods described by the precise language of the tax code.
1. In the first case, under SEC rules, safe-harbor provisions protect management from liability for making financial projections and forecasts made in good faith.
2. When trying to scare away sharks, it sometimes helps to stink up the water.
3. Here’s an example of an accounting safe harbor: a firm is losing money and therefore cannot claim an investment credit, so it transfers this claim to a company that is profitable and can therefore claim the credit. Then the profitable company leases the asset back to the unprofitable company and passes on the tax savings.
For example the safe harbour rules stipulate that the margin in a particular industry is 20%, and if the transfer price declared by a company, engaged in the that industry, is not less than the margin, the I-T authorities would accept the return without questions.
However, experts feel that the margins should not be rigid. “If a company reports a margin which is less than the stipulated benchmark, the authorities should give the enterprise an opportunity to defend its case.”
The rules, once introduced, will lend an investment friendly image to India. It will also put an end to the requirement of collecting huge amount of data regarding transfer pricing transactions, thereby saving time and energy.
Tax regimes of many developed nations such as Australia, New Zealand and Canada have incorporated safe harbour rules in their tax laws to provide clarity on the tax liability of multi-national companies operating in their countries.