New Delhi, October 24, 2017

MNCs had concerns that their regional offices having employees handling administrative functions for multiple countries would trigger PoEM

Routine administrative functions by the regional headquarters in India of multinational corporations (MNCs) have been exempted from taxes under the rules on Place of Effective Management (PoEM).

PoEM is a test of residential status of companies, triggered by the practice of some companies effectively operating out of India but incorporating themselves abroad, to exploit a low or zero tax environment.

The Central Board of Direct Taxes (CBDT) has said functions such as payroll, accounting, human resources or routine banking by these headquarters will not lead to a PoEM in India.

However, this is subject to a condition that regional headquarters should be functioning according to global policies of the parent entity and not be specific to any entity or group of entities.

There had been concerns at MNCs that their regional offices in India having employees handling administrative functions for multiple countries within the region would trigger PoEM, making them liable to Indian tax on income earned outside India.

PoEM guidelines provide that where the board of directors (BoD) stands aside by not exercising its powers of management and such powers are exercised by the holding company or person(s) in India, the PoEM is considered to be in India. CBDT has clarified that routine functions as cited above do not constitute a case where BoD stands aside.

CBDT says taxpayers should not use this circular for aggressive or abusive tax planning. If this happens, the General Anti-Avoidance Rule regarding taxes would be invoked.

Tax tale

  • Payroll, accounting, human resources or routine banking by regional headquarters will not lead to a PoEM
  • However, these regional headquarters should be functioning according to global policies of the parent entity
  • MNCs were concerned their regional offices in India having employees handling administrative functions for multiple countries would trigger PoEM, making them liable to Indian tax on income earned outside India

[The Business Standard]