New Delhi, June 15, 2017

But clarifies that such cos will be taxed at 40%

The Finance Ministry on Thursday issued draft norms for transitional provisions for foreign companies in the first year of becoming resident firms based on their place of effective management.

However, it has clarified that the tax on foreign companies qualifying as resident firms due to their place of effective management (POEM) will be the same as that for any foreign company — 40 per cent.

The draft notification by the Central Board of Direct Taxes (CBDT) provides exceptions, modifications and adaptation for computation of total income, treatment of unabsorbed depreciation, set off or carry forward of losses, collection, recovery and special provisions for tax avoidance.

“These will apply when a foreign company is said to be resident in India due to its POEM being in India for the first time, if it has never been resident in India before,” it said, seeking comments from stakeholders by June 23.

The notification, once finalised will come into effect from April 1, 2017.

According to the draft norms, the written down value of the depreciable asset of foreign companies, assessed in another jurisdiction will also be accepted in India for the relevant year. Similarly, any losses that were brought forward or unabsorbed depreciation by a foreign company in a foreign jurisdiction will be allowed to be set off and carried forward under the Income Tax Act, 1961.

In case where the accounting year does not end on March 31, the foreign company will be expected to prepare a balance sheet and profit and loss statement for the interim period until which the foreign company has turned resident.

It will also prepare similar documents for the previous 12 months from April 1, till the year it remains resident in India on account of its POEM.

Once the foreign company is held to be resident in India due to its POEM in India, it will get relief and income tax deduction in line with the provisions of Section 90 and 91 of the IT Act.

Introduced under the Finance Act, 2015, the POEM rules aim to target companies that operate in India but have shell companies outside the country for tax purposes.

Tax experts welcomed the draft circular and said it will help in meaningful implementation of POEM norms.

“Proactively providing such exception and adaptation provisions, CBDT has yet again ensured that unwarranted litigation on these issues are nipped in the bud,” said Rakesh Nangia, Managing Partner, Nangia & Co.

[The Hindu Business Line]