The Central Board of Direct Taxes (CBDT) on Wednesday issued a set of draft guidelines for determining the place of effective management (POEM) of companies for taxation purpose. The new rules are significant because if POEM of a firm with operations in India and abroad is considered to be in India, its tax liability in India could potentially rise. If POEM of a firm is in India, then its worldwide income — not just income from Indian operations — would be taxed here.
According to the CBDT’s new guidelines, comments on which can be posted at the e-mail address firstname.lastname@example.org or sent by post to the board by January 2, a company would be said to do “active business outside India” if its passive income — income from transactions with related parties, royalty, dividend, capital gains, interest income and the like — is more than half of the total income and less than half of the assets are located in India. Also, firms with less than half of the employees are “situated or residing” in India and the payroll expenses on such people is less than half of the firm’s total payroll spend would also be subject to POEM rules.
The norms, which provide directional guidance on many controversial issues on the way the POEM concept should be applied, also defined terms like “head office” of firm, “senior management” and essentially stuck to the principle that whoever is actually taking the commercial decisions should be considered its management and accordingly POEM will be determined. The new rules seek to circumscribe the leeway of firms to create corporate structures to hide their POEM status.
While Indian-incorporated firms are taxed at 30 per cent plus dividend distribution tax (DDT), non-resident firms are taxed at 40 per cent on Indian income without DDT. Although the tax rates on foreign firms are higher, the prospect of subjecting the worldwide income to taxation here could have potentially hit many MNCs with Indian stakeholders.
In case of a company engaged in active business outside India, the POEM would be presumed to be outside India if majority of the board meetings are held abroad. However, if it is found that the board of directors are standing aside and not exercising their powers and such powers are exercised by the holding company or any other person resident in India, then the POEM would be reckoned to be in India. FE