Income-tax dept issues norms to determine residency status of companies
New guidelines aim to check tax evasion, ensure foreign firms are not taxed on their global income.
New Delhi: The income-tax (I-T) department on Tuesday issued the final guidelines for place of effective management (PoEM) rules that seek to determine the residency status of a firm for calculating its tax liability.
The rules are effective from 1 April 2016 and will, therefore, apply from assessment year 2017-18 onwards, the income tax department said in a statement on Tuesday, putting at rest speculation that the government may defer or do away with PoEM in the upcoming budget on 1 February.
Place of effective management means the location where key decisions necessary for conduct of business are made. PoEM will determine the residence of a company incorporated in a foreign jurisdiction and help check tax evasion. It was introduced in Finance Act, 2015 to counter the practice of companies shifting management control outside India merely by holding a one-off board meeting to escape being taxed in here.
The final guidelines, which were issued after more than a year of the release of the draft guidelines, seek to remove ambiguities and ensure that only shell companies and companies created specifically with the intent of avoiding taxes in India even when effective management and control is in India, come under PoEM’s ambit.
It also proposes to incorporate safeguards to protect taxpayers. An assessing officer will have to seek permission of a commissioner-level officer before initiating an enquiry. The assessing officer will have to obtain approval from a three-member team of principal commissioners of income tax before holding that PoEM of a non-resident company is in India.
“The intent is not to target Indian multinationals which are engaged in business activity outside India… It is emphasized that these guidelines are not intended to cover foreign companies or to tax their global income, merely on the ground of presence of permanent establishment or business connection in India,” the statement clarified.
It added that companies having a turnover of Rs50 crore or less in a financial year will be exempted from PoEM’s ambit but this clause was missing from the final guidelines.
The guidelines provide for an active-business-outside-India test to ensure that those companies that are engaged in active business outside India do not come under PoEM’s ambit.
Hitesh Sawhney, partner, tax and regulatory services at PwC, said the guidelines seek to remove ambiguity. “It provides clearer definitions of how total assets, total employees and total payroll expenditure will be calculated to determine POEM’s applicability,” he said.
Analysts said since the government issued the final guidelines with only two months to go for the end of 2016-17, it should delay its implementation to 1 April 2017 to give companies more time to prepare for the transition.