India Clarifies PoEM Rules For Regional Headquarters

by Mary Swire, Tax-News.com, Hong Kong

26 October 2017

India's Central Board of Direct Taxes (CBDT) on October 23 further clarified the Place of Effective Management (PoEM) rules.

In the 2015 Finance Act, India amended Section 6(3) of the Income Tax Act to provide that a company, other than an Indian company, will be tax resident in India if its PoEM in that year is in India. PoEM is defined to mean a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance, made.

The Indian tax authorities have released further guidance following concerns from taxpayers that the PoEM rules may be triggered where certain employees are in India, and not where the company's regional headquarters are declared to be, and are responsible for tasks covering a group's operations in multiple countries.

On this point, the Circular states: "Representations have been received from the stakeholders wherein concerns have been raised that [...] PoEM may be triggered in cases of certain multinational companies with regional headquarter structure merely on the ground that certain employees having multi-country responsibility or oversight over the operations in other countries of the region are working from India, and consequently, their income from operations outside India may be taxed in India."

The concerns are the result of paragraph 7.1 of the guiding principles for the determination of PoEM issued on January 24, 2017, in Circular No. 06 of 2017. The Ministry of Finance explained that this states that "if on the basis of facts and circumstances it is established that the Board of Directors of the company are standing aside and not exercising their powers of management and such powers are being exercised by either the holding company or any other person(s) resident in India then the PoEM shall be considered to be in India."

The rules also stipulate that generally where key management functions and the majority of meetings of the board of directors take place outside of India, the PoEM rules will not be triggered, save for the activation of anti-avoidance provisions.

The new circular clarifies that where the general policies of the group are being followed, the delivery of certain functions and exercise of certain powers within India will not be viewed as the board of directors stepping aside.

New Circular 25 of 2017 states: "So long as the Regional Headquarter operates for subsidiaries/ group companies in a region within the general and objective principles of global policy of the group laid down by the parent entity in the field of payroll functions, accounting, HR functions, IT infrastructure and network platforms, supply chain functions, routine banking operational procedures, and not being specific to any entity or group of entities per se, it would, in itself, not constitute a case of Board of Directors of companies standing aside and such activities of regional headquarter in India alone will not be a basis for establishment of PoEM for such subsidiaries/ group companies."

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