Draft rules tighten tax norms for MNCs

Such firms to pay tax in India if decision- makers hold

Multinational companies ( MNC) will be liable to pay tax in India if those who take key decisions conduct most of their meetings in India, even if the decisions are implemented in another tax jurisdiction, according to the draft guidelines of the finance ministry.

The proposed rules might force MNCs to locate their regional controller offices outside India, say experts.

With a view to tightening loopholes to deter tax evasion by multinational companies —Indian or foreign — the government on Wednesday released guidelines on place of effective management ( PoEM). The rules will affect Indian companies that take most decisions about their foreign subsidiaries from India and also foreign multinational companies with shell divisions.

The rules will come into effect from 2016- 17 assessment year, which means this financial year.

PoEM has been defined as “ 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.” Businesses will be liable to be taxed in India if most meetings of the board of directors of the company are held within India. In cases where the board of directors does not exercise its powers of management and such powers are exercised by either the holding company or any other person resident in India, it would be assessed where the decisions are taken.

Basically, the authorities will apply a twostage test to determine if companies are to be taxed in India. The first stage would be identification of persons who take important decisions in these companies. These could be managing director, CEO, financial director, chief financial officer, chief operating officer, heads of various divisions or departments such as chief information, technology officer, or director for sales or marketing.

The second stage is to determine the place where these decisions are made. If these are made in India, the company would be liable to be taxed in the country.

The rules will also apply a test of active company in India to tax them. An active company in India is one whose passive income — royalty, dividend, capital gains, interest or rental besides income from sale and purchase from associated companies — is more than 50 per cent of the total income and more than half its assets and total employees are situated in India or are resident of India.

The average of the data of the previous year and two years prior to that will be taken into account to determine PoEM.

The Central Board of Direct Taxes would apply POEM rules as substance over form and would take them jointly rather than separately. The draft guidelines said. “ It needs to be emphasised the determination of PoEM is to be based on all relevant facts related to the management and control of the company, and is not to be determined on the basis of isolated facts that by itself do not establish effective management,” the guidelines said.

Business Standard, New Delhi, 24th Dec. 2015