Safe Harbour Rules in Nepal: Complete Guide to Transfer Pricing Under the Income Tax Act

Introduction

Nepal has introduced a statutory Safe Harbour framework for transfer pricing through the amendments made by the Finance Act, 2083 to the Income Tax Act, 2058. The new provision, Section 33A, establishes prescribed conditions under which eligible taxpayers can determine the transfer price of specified transactions by applying the statutory safe harbour benchmarks. The reform adds a more predictable mechanism to Nepal’s existing transfer pricing framework, which is principally governed by Section 33 of the Income Tax Act and the Inland Revenue Department‘s Transfer Pricing Directives, 2024 (2081 BS). The official IRD Transfer Pricing Directives apply to cross-border transactions between associated persons and are effective from income year 2024/25.

The Safe Harbour Rule is particularly relevant to multinational enterprises, foreign-invested companies, Nepalese entities with associated enterprises abroad, information technology and IT-enabled service exporters, entities providing low value-added intra-group services, and businesses involved in qualifying foreign-currency financing transactions. The regime seeks to provide greater certainty where taxpayers satisfy prescribed statutory conditions.

Section 33A should, however, be understood as a specific transfer pricing mechanism rather than a general exemption from income tax. A taxpayer using safe harbour remains subject to other provisions of the Income Tax Act, including rules concerning taxable income, deductible expenses, withholding tax, documentation, filing, audit, and other tax obligations. Nitipartners and Associates is a leading law firm in Nepal.

What Is the Safe Harbour Rule Under Section 33A?

A Safe Harbour Rule is a statutory mechanism under which a taxpayer that satisfies prescribed conditions may use predetermined pricing or profitability parameters for qualifying controlled transactions. Instead of determining an arm’s length outcome solely through a conventional transfer pricing analysis, the taxpayer may rely on the benchmark prescribed by Section 33A for an eligible transaction.

The basic transfer pricing principle remains contained in Section 33 of the Income Tax Act. That provision empowers the tax administration to determine the arm’s length amount where transactions between associated persons do not reflect an arm’s length result. Section 33A creates an additional statutory mechanism for specified taxpayers and transactions.

The practical effect is that a qualifying taxpayer can obtain greater certainty by electing to apply the prescribed safe harbour conditions. Current professional and tax materials published following the Finance Act, 2083 identify Section 33A as introducing this mechanism for eligible taxpayers.

The taxpayer must nevertheless establish that the transaction falls within the statutory scope of the safe harbour and that all applicable conditions have been satisfied. A taxpayer should not assume that merely having a related-party or cross-border transaction creates an automatic right to use safe harbour.

Legal Framework for Transfer Pricing in Nepal

Nepal’s transfer pricing framework consists of the Income Tax Act, 2058, the Income Tax Rules, 2059, applicable Finance Acts, and the Transfer Pricing Directives issued by the Inland Revenue Department. The 2024 Transfer Pricing Directives specifically state that they apply to cross-border transactions between associated persons and operate subject to the Income Tax Act and Income Tax Rules.

Section 33 is the principal statutory transfer pricing provision. It addresses transactions between associated persons and permits the tax administration to determine an arm’s length amount where appropriate. Section 33A now provides the Safe Harbour Rule, while the Finance Act, 2083 also introduced a broader certainty framework through Section 33B concerning Advance Pricing Agreements.

The distinction is significant. Traditional transfer pricing requires the taxpayer to determine an arm’s length price using an appropriate method and supporting analysis. Safe harbour provides prescribed parameters for qualifying transactions. An Advance Pricing Agreement, by contrast, provides an agreed approach to transfer pricing for covered transactions under the statutory APA framework.

The IRD’s Transfer Pricing Directives remain relevant because Section 33A does not eliminate the broader transfer pricing framework.

Who Qualifies for Safe Harbour in Nepal?

The Safe Harbour regime is designed for taxpayers satisfying the statutory eligibility requirements. The Finance Act, 2083 framework has been reported as applying to taxpayers whose annual controlled transactions fall within the prescribed NPR 1 billion threshold and who satisfy one of the specified safe harbour pathways.

Eligibility should therefore be tested using the actual facts of the taxpayer rather than relying only on its corporate status or foreign ownership. A company does not qualify simply because it is a subsidiary of a multinational enterprise. It must have a qualifying transaction, satisfy the relevant financial threshold, meet the conditions applicable to that transaction, and comply with the election and reporting requirements.

The principal areas requiring review are:

• The taxpayer’s annual turnover or transaction threshold prescribed by Section 33A.
• Whether the transaction is a qualifying controlled international transaction.
• Whether the taxpayer and counterparty fall within the statutory associated-person framework.
• Whether the transaction falls within one of the prescribed safe harbour categories.
• Whether the applicable profit margin, interest spread, or cost mark-up is satisfied.
• Whether the taxpayer makes the required election and disclosures.
• Whether the taxpayer can maintain the records necessary to demonstrate compliance.

The exact statutory wording should be checked against the Finance Act, 2083 and subsequent rules or IRD directions applicable to the relevant income year.

NPR 1 Billion Threshold for Safe Harbour Eligibility

The Safe Harbour framework introduced through the Finance Act, 2083 applies to taxpayers within the prescribed transaction threshold. Current published professional analyses describe the threshold as NPR 1 billion, equivalent to NPR 100 crore, for the relevant safe harbour eligibility test.

The threshold should not be confused with the taxpayer’s general annual turnover for every tax purpose. The precise statutory wording and calculation methodology must be considered when determining whether a taxpayer satisfies Section 33A.

A taxpayer approaching or exceeding the threshold should perform the calculation carefully and maintain supporting schedules. The threshold may determine whether the taxpayer can elect safe harbour and therefore has direct implications for transfer pricing planning.

For multinational groups, the analysis should also consider the nature and aggregate value of controlled transactions. The organization should not rely solely on the financial statements without reviewing the related-party transaction schedules and relevant statutory definitions.

Three Safe Harbour Pathways Under Section 33A

The new Nepalese Safe Harbour framework identifies three principal transaction categories in the materials published following Finance Act, 2083. These pathways cover IT service exports, qualifying foreign-currency intra-group loans, and low value-added services.

Each pathway has separate conditions. A taxpayer should therefore identify the precise nature of the transaction before selecting the applicable benchmark.

The safe harbour does not mean that a taxpayer can select whichever benchmark produces the most favorable tax result. The taxpayer must satisfy the conditions corresponding to the actual transaction.

Pathway A: IT and IT-Enabled Service Exporters

The first safe harbour pathway applies to qualifying exports of information technology and IT-enabled services. This pathway is particularly relevant to Nepal’s software development, business process outsourcing, technology consulting, and other qualifying service businesses that provide services to associated enterprises outside Nepal.

The prescribed benchmark requires the qualifying taxpayer to maintain at least a 15% operating profit margin on operating costs, according to current summaries of Section 33A.

For an IT service exporter, the calculation requires careful identification of qualifying operating costs and operating income. The taxpayer should maintain a consistent accounting methodology and ensure that the margin is supported by its financial statements and transfer pricing records.

A company should also verify whether its particular services fall within the statutory category. Software development, IT consulting, and IT-enabled services may be relevant, but the safe harbour should not be extended to every service merely because the business operates in the technology sector.

Pathway B: Foreign-Currency Intra-Group Loans

The second pathway concerns qualifying financing transactions between associated enterprises. Under the reported Section 33A framework, the interest rate for qualifying foreign-currency intra-group loans is determined by reference to the applicable benchmark plus a prescribed spread of 200 to 400 basis points.

The application of this pathway requires attention to the currency of the loan, relevant reference rate, tenure, credit characteristics, and other statutory conditions. A taxpayer should document the loan agreement, principal amount, currency, maturity, repayment terms, security, and interest calculation.

The safe harbour benchmark should not be confused with a universal interest rate for every related-party loan. The taxpayer must identify the prescribed reference rate and apply the spread required for the relevant transaction.

Cross-border financing also involves separate Nepalese foreign exchange and regulatory requirements. Therefore, transfer pricing compliance should be reviewed alongside the legal requirements governing foreign borrowing and foreign exchange transactions.

Pathway C: Low Value-Added Intra-Group Services

The third pathway addresses qualifying low value-added services provided between associated enterprises. These may include routine administrative, back-office, support, or other services that satisfy the statutory requirements for low value-added treatment.

The safe harbour provides for a mark-up of up to 5% of the relevant total cost base, according to current summaries of the new provision.

The taxpayer must correctly determine the cost base before applying the mark-up. Direct and indirect costs should be identified consistently, and costs that do not properly relate to the service should not be included merely to manipulate the safe harbour result.

The service agreement should clearly identify the nature of the services, recipient, pricing mechanism, cost allocation method, invoicing procedure, and supporting records. This documentation becomes particularly relevant where a Nepalese subsidiary receives centralized services from its foreign parent or another associated enterprise.

Five-Year Safe Harbour Commitment

One of the significant features of the new framework is the reported five-income-year commitment following election of the Safe Harbour Rule. Current professional summaries state that once selected, the safe harbour applies for five consecutive income years, subject to the statutory conditions and circumstances recognized under the law.

This means that a taxpayer should not make the election based solely on the tax outcome for one financial year. The taxpayer should project its business model, expected margins, transaction volumes, financing requirements, operating costs, and related-party arrangements across the commitment period.

The five-year period can provide consistency and greater predictability, but it also creates a planning obligation. A taxpayer whose commercial model is likely to change substantially should assess the consequences before making an election.

Any statutory provision permitting cessation, modification, or termination of the safe harbour should be examined carefully against the facts of the taxpayer.

Election and Procedural Requirements

A taxpayer seeking to use Section 33A should complete the prescribed election and comply with the filing requirements applicable to the safe harbour regime. The statutory framework should be read together with subsequent regulations, administrative procedures, forms, notices, and IRD directives issued for implementation.

The taxpayer should prepare its transfer pricing records before filing the relevant income tax return. The records should demonstrate the nature of the controlled transaction, eligibility for the relevant pathway, calculation of the prescribed benchmark, and compliance with the applicable conditions.

A practical compliance process should include:

1. Identify all cross-border controlled transactions.
2. Determine whether the parties qualify as associated persons.
3. Calculate the relevant turnover or transaction threshold.
4. Identify the applicable Section 33A pathway.
5. Calculate the prescribed safe harbour benchmark.
6. Confirm that the transaction satisfies all statutory conditions.
7. Prepare supporting financial and transfer pricing documentation.
8. Make the required election and disclosures.
9. File the annual income tax return consistently with the election.
10. Maintain records for IRD examination.

Transfer Pricing Documentation Under Safe Harbour

Safe harbour does not mean that a taxpayer can abandon transfer pricing documentation. The taxpayer should retain sufficient evidence to demonstrate that the transaction satisfies the statutory conditions.

The IRD’s Transfer Pricing Directives, 2024 apply to cross-border transactions between associated persons and provide a framework for implementation and interpretation of Nepal’s transfer pricing rules.

Relevant records may include:

• Intercompany agreements.
• Invoices and payment records.
• Financial statements.
• General ledgers and cost schedules.
• Related-party transaction schedules.
• Functional analysis.
• Details of the services provided.
• Loan agreements and interest calculations.
• Benchmark rate evidence for financing transactions.
• Cost allocation workings.
• Operating margin calculations.
• Safe harbour election records.
• Annual income tax return disclosures.
• Supporting correspondence with associated enterprises.

Documentation should be prepared contemporaneously rather than reconstructed only after an IRD inquiry.

Relationship Between Section 33 and Section 33A

Section 33 and Section 33A should be read together. Section 33 establishes the broader arm’s length framework for associated-person transactions, while Section 33A introduces a statutory safe harbour mechanism for qualifying taxpayers and transactions.

This distinction matters because safe harbour is not a replacement for the entire transfer pricing regime. A transaction that does not qualify for Section 33A remains subject to the ordinary transfer pricing rules.

Similarly, a taxpayer should not assume that an unrelated transaction can be brought within Section 33A merely because its price resembles one of the safe harbour benchmarks. The statutory conditions must first be satisfied.

The IRD’s Transfer Pricing Directives remain relevant to transactions covered by Nepal’s transfer pricing framework. The official directive expressly states that it is subordinate to the Income Tax Act and Income Tax Rules.

Safe Harbour and Advance Pricing Agreement

Nepal’s Finance Act, 2083 also introduced an Advance Pricing Agreement framework through Section 33B. Current analyses describe Section 33B as providing a statutory basis for unilateral, bilateral, and multilateral APAs, together with relevant certainty mechanisms.

Safe harbour and an APA serve related but different purposes. Safe harbour uses predetermined statutory parameters for specified transactions. An APA involves agreement on an appropriate transfer pricing methodology or outcome for covered transactions.

A taxpayer with transactions outside the safe harbour categories may therefore need to consider the ordinary transfer pricing framework or the APA mechanism rather than attempting to apply Section 33A.

For large multinational groups with complex transactions, the APA framework may provide a more suitable route where a fixed safe harbour benchmark does not reflect the economic circumstances of the business.

Benefits of Safe Harbour Rules in Nepal

The Safe Harbour Rule can provide greater predictability for eligible taxpayers. A taxpayer that satisfies the statutory conditions can determine qualifying transactions using the prescribed benchmark instead of relying exclusively on a conventional transfer pricing analysis.

The principal practical benefits include:

• Greater certainty over qualifying transfer prices.
• Reduced risk of disagreement over the applicable arm’s length outcome.
• More predictable tax positions.
• Simplified transfer pricing planning for specified transactions.
• Greater consistency over the applicable benchmark.
• Reduced scope for prolonged disputes concerning covered transactions.
• Improved ability to forecast tax costs.
• Greater clarity for multinational groups establishing Nepal operations.

These benefits apply only within the statutory scope of Section 33A. Safe harbour does not eliminate general tax compliance, and the taxpayer remains responsible for satisfying the conditions of the regime.

Limitations of the Safe Harbour Regime

Safe harbour does not provide unrestricted protection from tax assessment. It applies only to qualifying transactions and only where the taxpayer satisfies the prescribed conditions.

A taxpayer may still be subject to examination of matters outside the safe harbour. For example, the IRD may review whether an expense is deductible, whether withholding tax was correctly applied, whether the taxpayer has accurately reported revenue, or whether a transaction actually falls within the safe harbour category.

The taxpayer should also consider whether the prescribed benchmark is commercially appropriate. An IT exporter that normally earns significantly more than the safe harbour margin may determine that ordinary transfer pricing analysis produces a more suitable result. Similarly, a financing transaction may require detailed economic analysis where its terms fall outside the prescribed conditions.

Safe harbour should therefore be treated as a statutory compliance option, not an automatic tax advantage in every circumstance.

Practical Compliance Checklist for Companies

Companies considering the Nepal Safe Harbour Rules should conduct a transaction-level review before making an election. The following checklist can help establish the initial compliance position:

• Review the Income Tax Act, 2058 and Finance Act, 2083.
• Review Section 33 and Section 33A.
• Review Section 33B where APA treatment may be relevant.
• Review the IRD Transfer Pricing Directives, 2024.
• Identify associated enterprises.
• Identify international controlled transactions.
• Calculate the relevant threshold.
• Determine the applicable safe harbour pathway.
• Calculate the prescribed margin, interest spread, or mark-up.
• Review intercompany agreements.
• Reconcile the transfer pricing calculation with the financial statements.
• Prepare the required election and tax-return disclosures.
• Maintain supporting documents.
• Monitor compliance throughout the five-year period.

The IRD currently publishes its Transfer Pricing Directives through its official transfer pricing section.

FAQs

What is the Safe Harbour Rule in Nepal?

The Safe Harbour Rule under Section 33A provides prescribed transfer pricing benchmarks for qualifying transactions. Eligible taxpayers that satisfy the statutory conditions can use the prescribed pricing, margin, or mark-up instead of determining the outcome solely through a conventional transfer pricing analysis. The regime is intended to provide greater certainty for qualifying cross-border controlled transactions.

What is the turnover threshold for Nepal’s Safe Harbour Rule?

Current materials concerning Finance Act, 2083 describe the Safe Harbour framework as applying to eligible taxpayers within a NPR 1 billion, or NPR 100 crore, threshold. The precise statutory calculation should be checked against Section 33A and applicable implementation provisions for the relevant income year before making an election.

What is the safe harbour margin for IT service exporters?

The IT and IT-enabled service pathway provides for a minimum 15% operating profit margin on operating costs, according to current summaries of Section 33A. A taxpayer must also satisfy the other statutory conditions governing the transaction and eligibility. The 15% benchmark should therefore not be treated as the only requirement for safe harbour qualification.

What is the safe harbour rate for foreign-currency loans?

For qualifying foreign-currency intra-group loans, the reported Section 33A framework uses a prescribed reference rate plus a spread of 200 to 400 basis points. The applicable reference rate and spread must be determined according to the statutory conditions for the particular transaction. Loan documentation and the interest calculation should support the taxpayer’s position.

What is the safe harbour mark-up for low value-added services?

The Safe Harbour framework provides a mark-up of up to 5% of the relevant total cost base for qualifying low value-added services. The taxpayer must first establish that the services fall within the statutory category and calculate the appropriate cost base consistently. The 5% mark-up should then be applied according to the prescribed requirements.

How long does the Safe Harbour election apply?

Current materials on Section 33A state that a taxpayer’s election applies for five consecutive income years, subject to the statutory conditions governing the regime. A taxpayer should therefore assess its expected transactions and business model over the entire commitment period rather than making the election solely on the basis of one year’s expected tax result.

Does Safe Harbour eliminate transfer pricing documentation?

No. Safe harbour does not mean that a taxpayer can disregard its transfer pricing records. The taxpayer should retain evidence demonstrating eligibility, the nature of the controlled transaction, the applicable safe harbour pathway, the benchmark calculation, and compliance with the relevant filing requirements. The IRD Transfer Pricing Directives continue to form part of Nepal’s broader transfer pricing framework.

Does Safe Harbour prevent all IRD tax audits?

No. Safe harbour concerns the transfer pricing treatment of qualifying covered transactions. It does not prevent the Inland Revenue Department from examining other tax matters, including revenue recognition, deductible expenses, withholding tax, accounting records, or transactions outside the safe harbour. A taxpayer must continue to comply with the Income Tax Act and other applicable tax laws.

Is Safe Harbour mandatory for eligible taxpayers?

No. The Safe Harbour framework is an election-based mechanism rather than a general mandatory pricing rule. An eligible taxpayer should compare the statutory safe harbour with the ordinary transfer pricing rules and, where relevant, the Advance Pricing Agreement framework. The taxpayer should assess the commercial and tax consequences before making a binding election.

Can every multinational company operating in Nepal use Safe Harbour?

No. Multinational status alone does not create eligibility. The taxpayer must satisfy the applicable statutory threshold, have a qualifying controlled transaction, fall within one of the prescribed pathways, and meet the conditions governing that pathway. Transactions outside Section 33A remain subject to the ordinary transfer pricing provisions and other applicable tax rules.

Conclusion

The Safe Harbour Rules introduced through Section 33A represent a significant development in Nepal’s transfer pricing framework. The provision creates a statutory mechanism through which qualifying taxpayers can use predetermined benchmarks for specified controlled transactions. The framework is particularly relevant to IT and IT-enabled service exporters, qualifying foreign-currency intra-group financing, and low value-added intra-group services.

The principal reported benchmarks are a minimum 15% operating profit margin for qualifying IT service exports, a prescribed reference rate plus 200 to 400 basis points for qualifying foreign-currency intra-group loans, and a mark-up of up to 5% for qualifying low value-added services. The regime also includes a five-year commitment for taxpayers that elect to use it.

The Safe Harbour Rule should nevertheless be applied carefully. Taxpayers must establish eligibility, identify associated-person relationships, calculate the relevant threshold, classify the transaction correctly, apply the prescribed benchmark, make the required election, and maintain supporting documentation. Section 33 remains relevant to transactions outside the safe harbour framework, while Section 33B provides a separate statutory framework for Advance Pricing Agreements.

For businesses operating in Nepal with international related-party transactions, the appropriate approach is to review Section 33, Section 33A, Section 33B, the Income Tax Rules, the Finance Act, 2083, and the applicable IRD Transfer Pricing Directives together. The official IRD Transfer Pricing Directives, 2024 are expressly applicable to cross-border transactions between associated persons and became effective from income year 2024/25.

Taxpayers should verify the final statutory text, implementing rules, forms, and IRD administrative guidance applicable to the relevant income year before making a Safe Harbour election. The precise treatment of a transaction depends on its legal structure, commercial substance, associated-person relationship, financial characteristics, and compliance with the conditions prescribed by Nepalese law.

Disclaimer: This article is prepared for general informational purposes based on the statutory and administrative materials presently available, including the Income Tax Act, 2058, Finance Act, 2083, and the Inland Revenue Department’s Transfer Pricing Directives, 2024. It does not constitute legal, tax, accounting, or financial advice. The application of Section 33A should be assessed against the final legislation, applicable rules, IRD procedures, and the taxpayer’s specific facts before an election or tax position is adopted.