Chapter 7 · Part 7 — Transfer Pricing, Safe Harbour and APAs
Transfer Pricing, Safe Harbour and APAs
Nepal's new cross-border pricing regime — who is an associated person and what safe harbour costs.
7 of 14 · 11 min
Nepal's most significant new tax regime this year. If your business transacts with a related party across a border, this Part is not optional.
The problem transfer pricing solves
┌──────────────────────────────────────────────────────────────────────┐
│ A Nepali subsidiary sells goods to its foreign parent. │
│ │
│ If it sells at a LOW price: │
│ • Nepali profit is small → little Nepali tax │
│ • Foreign profit is large → taxed abroad, perhaps lower │
│ │
│ If it sells at a HIGH price: │
│ • the reverse │
│ │
│ Neither party is cheating anyone in the ordinary sense — they are │
│ the same economic group. But the PRICE decides which country's │
│ treasury gets the tax. │
└──────────────────────────────────────────────────────────────────────┘
│
▼
╔═══════════════════════════════════════════════════════════════════╗
║ THE ARM'S LENGTH PRINCIPLE ║
║ ║
║ Related parties must price transactions as INDEPENDENT ║
║ parties would have done in comparable circumstances. ║
╚═══════════════════════════════════════════════════════════════════╝The two new definitions
"International Transaction" — Section 2(kha1)
Four elements, all of which matter:
1. A DEALING — any transaction, not only a sale
2. In goods, services, FINANCE or INTANGIBLE PROPERTY
— loans and IP are explicitly in scope
3. With a NON-RESIDENT — the cross-border element
4. That AFFECTS income, expenses, assets or liabilities
— a balance-sheet effect is enough"Safe Harbour Rule" — Section 2(KaBha1)
Meaning: if you fall inside the safe harbour and follow its rules, the price you use is accepted as arm's length. You do not have to prove it with a full comparability study.
Who is an "associated person"
The regime applies between associated persons. Four tests — meeting any one is enough.
┌──────────────────────────────────────────────────────────────────────┐ │ (a) CONTROL TEST │ │ An entity, alone or with related parties, controls at least │ │ 30% of another entity's income, capital or voting rights, │ │ or receives income from it. │ │ │ │ ! 30% — a low threshold. Well below majority control. │ ├──────────────────────────────────────────────────────────────────────┤ │ (b) FINANCING TEST │ │ Another person lends to an entity and MORE THAN 50% of that │ │ person's assets consist of loans and advances to that entity. │ │ │ │ ! Catches a financing vehicle whose main asset is the loan. │ ├──────────────────────────────────────────────────────────────────────┤ │ (c) INTELLECTUAL PROPERTY TEST │ │ An entity relies MAINLY OR ENTIRELY on another person's │ │ intellectual property, technical know-how or commercial │ │ rights to earn revenue. │ │ │ │ ! A franchisee or licensee can be an associated person even │ │ with NO shareholding link at all. │ ├──────────────────────────────────────────────────────────────────────┤ │ (d) SUPPLY TEST │ │ An entity sources at least 90% of the raw materials or │ │ consumables that another person needs. │ │ │ │ ! A dominant supplier relationship, again with no ownership. │ └──────────────────────────────────────────────────────────────────────┘
The Safe Harbour Rules — Section 33Ka
╔═══════════════════════════════════════════════════════════════════╗ ║ AVAILABLE TO: taxpayers with TURNOVER UP TO Rs 1 BILLION ║ ║ ║ ║ Meet the prescribed condition for your transaction type and ║ ║ the price is accepted as arm's length for controlled ║ ║ transactions. ║ ╚═══════════════════════════════════════════════════════════════════╝
The three prescribed conditions
┌──────────────────────────────────────────────────────────────────────┐ │ (a) IT SERVICE EXPORTERS │ │ Add a MINIMUM 15% OPERATING MARGIN on operating costs. │ │ │ │ Price = Operating cost × (1 + 15%) │ │ │ │ ILLUSTRATIVE: │ │ Operating cost of delivering the service Rs 40,000,000 │ │ Minimum arm's-length charge │ │ = 40,000,000 × 1.15 = Rs 46,000,000 │ │ Minimum taxable margin = Rs 6,000,000 │ ├──────────────────────────────────────────────────────────────────────┤ │ (b) INTERCOMPANY US DOLLAR LOANS │ │ Add 200 to 400 BASIS POINTS to reference rates. │ │ │ │ Rate = Reference rate + (2.00% to 4.00%) │ │ │ │ ILLUSTRATIVE: │ │ Reference rate 5.00% │ │ Spread within the safe harbour band +2.00%–4.00% │ │ Acceptable rate range 7.00%–9.00% │ │ │ │ On a USD 2,000,000 loan, that is USD 140,000 to │ │ USD 180,000 of annual interest — a USD 40,000 range │ │ the taxpayer may choose within. │ ├──────────────────────────────────────────────────────────────────────┤ │ (c) LOW VALUE-ADDING SERVICES │ │ May add UP TO 5% PROFIT TO COST, as the IRD determines. │ │ │ │ Price = Cost × (1 + up to 5%) │ │ │ │ "Low value-adding" means routine support — accounting, │ │ HR administration, IT helpdesk — not core value drivers. │ └──────────────────────────────────────────────────────────────────────┘
The five-year lock
╔═══════════════════════════════════════════════════════════════════╗ ║ ONCE SELECTED, SAFE HARBOUR RULES APPLY FOR AT LEAST FIVE ║ ║ INCOME YEARS — unless the transaction changes substantially. ║ ╚═══════════════════════════════════════════════════════════════════╝
The trade-off
┌────────────────────────────────┬────────────────────────────────────┐ │ SAFE HARBOUR │ FULL TRANSFER PRICING STUDY │ ├────────────────────────────────┼────────────────────────────────────┤ │ Certainty — price accepted │ Price must be justified with │ │ Cheap — no comparability │ comparables and documentation │ │ study needed │ Expensive and time-consuming │ │ Locked in for 5 years │ Re-assessed each year │ │ Margin may exceed your │ Reflects your actual economics │ │ actual commercial margin │ │ │ ⇒ you may pay MORE tax than │ ⇒ may support a lower margin, │ │ strictly necessary, in │ but you must prove it and │ │ exchange for certainty │ defend it on audit │ └────────────────────────────────┴────────────────────────────────────┘
Advance Pricing Agreements — Section 33Kha
╔═══════════════════════════════════════════════════════════════════╗ ║ The IRD may enter into BILATERAL or MULTILATERAL APAs for ║ ║ international transactions between associated enterprises. ║ ╚═══════════════════════════════════════════════════════════════════╝
What an APA gives you.
┌──────────────────────────────────────────────────────────────────────┐ │ • Agreed transfer prices count as ARM'S LENGTH for up to │ │ FIVE CONSECUTIVE YEARS │ │ │ │ • And may ROLL BACK up to FOUR YEARS │ │ → so a single agreement can settle up to NINE YEARS │ │ │ │ • The APA BINDS ALL PARTIES — the taxpayer and the │ │ administration — unless the law or key terms change materially │ └──────────────────────────────────────────────────────────────────────┘ ! AN APA IS VOID FROM THE START if a party secures it through FRAUD, FALSE FACTS or MISINFORMATION.
Why "bilateral or multilateral" matters.
UNILATERAL APA — with Nepal only
Nepal agrees the price. The OTHER country
does not, and may still adjust. Risk of
DOUBLE TAXATION remains.
BILATERAL APA — Nepal AND the other jurisdiction agree
Both sides bound. Double taxation risk
substantially removed.
MULTILATERAL — three or more jurisdictionsThe decision framework
Do you transact with a NON-RESIDENT?
│
┌─────────────┴─────────────┐
NO YES
│ │
▼ ▼
Transfer pricing Are you and the counterparty
regime does not ASSOCIATED PERSONS?
apply (any of the four tests, 7.3)
│
┌───────────────┴───────────────┐
NO YES
│ │
▼ ▼
Ordinary rules apply ┌──────────────────────────┐
│ TRANSFER PRICING APPLIES │
└────────────┬─────────────┘
│
┌────────────────────────────┼──────────────────┐
▼ ▼ ▼
Turnover ≤ Rs 1 billion Larger, or complex, Want long
AND transaction fits or you want your certainty
a safe harbour category real margin across
│ │ borders
▼ ▼ ▼
┌─────────────────────┐ ┌────────────────────┐ ┌──────────────┐
│ SAFE HARBOUR │ │ FULL TP STUDY │ │ APA │
│ Section 33Ka │ │ with comparables │ │ Section 33Kha│
│ Locked 5 years │ │ and documentation │ │ 5 yrs + 4 │
│ Cheap, certain, │ │ Reflects your │ │ rollback │
│ possibly costly │ │ economics; must │ │ Bilateral │
│ │ │ be defended │ │ preferred │
└─────────────────────┘ └────────────────────┘ └──────────────┘Why Nepal introduced this now
┌──────────────────────────────────────────────────────────────────────┐ │ 1. IT SERVICE EXPORTS have grown substantially. A Nepali │ │ development centre serving a foreign parent is exactly the │ │ structure transfer pricing exists to police — hence the │ │ specific 15% safe harbour for IT exporters. │ │ │ │ 2. INTERCOMPANY FINANCE. Foreign-owned groups fund Nepali │ │ subsidiaries with USD loans. The interest rate decides how │ │ much profit leaves Nepal — hence the 200–400bp band. │ │ │ │ 3. INTERNATIONAL NORMS. A transfer pricing regime with safe │ │ harbours and APAs is standard practice; its absence is a │ │ gap foreign investors also notice, because it means │ │ UNCERTAINTY for them too. │ │ │ │ 4. The budget explicitly wants to SIMPLIFY foreign investment, │ │ repatriation and technology transfer (Part 1). A predictable │ │ transfer pricing regime supports that rather than opposing it. │ └──────────────────────────────────────────────────────────────────────┘
Common mistakes
MYTH "We don't export, so transfer pricing doesn't apply."
FACT It covers goods, SERVICES, FINANCE and INTANGIBLE PROPERTY.
An intercompany loan or a royalty is in scope.
MYTH "We're associated only if there is shareholding."
FACT Tests (c) and (d) create association through IP dependence
or 90% supply — with no ownership at all.
MYTH "30% is not control."
FACT 30% IS the statutory test here.
MYTH "We'll use safe harbour this year and review next year."
FACT It locks for at least FIVE income years.
MYTH "A unilateral APA prevents double taxation."
FACT Only a bilateral or multilateral APA binds the other country.
MYTH "Safe harbour means we pay less tax."
FACT It means CERTAINTY. It may mean paying tax on a higher margin
than your actual one.Part 7 — Revision table
| Concept | FY 2083/84 position |
|---|---|
| International Transaction | Section 2(kha1) — goods, services, **finance or intangible property** with a non-resident affecting income, expenses, assets or liabilities |
| Safe Harbour Rule | Section 2(KaBha1) — transactions meeting Section 33Ka criteria as arm's length |
| Associated person (a) | Controls ≥ **30%** of income, capital or voting rights, or receives income |
| Associated person (b) | Lender where **>50%** of its assets are loans/advances to the entity |
| Associated person (c) | Entity relies **mainly or entirely** on the other's IP, know-how or commercial rights |
| Associated person (d) | Supplies at least **90%** of raw materials or consumables needed |
| Safe harbour eligibility | Turnover up to **Rs 1 billion** |
| IT service exporters | Minimum **15%** operating margin on operating costs |
| Intercompany USD loans | Reference rate **+200 to 400 bps** |
| Low value-adding services | Up to **5%** profit to cost, as IRD determines |
| Safe harbour duration | At least **5 income years** unless the transaction changes substantially |
| APA (Section 33Kha) | Bilateral or multilateral; **5 years** forward, **4 years** rollback |
| APA binding | Binds all parties unless law or key terms change materially |
| APA void | From the start, if obtained by fraud, false facts or misinformation |
| Implementation | IRD to issue directives — read before applying |
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