Foreign companies with India PoEM subject to higher 40 percent tax rate, government concludes

By Mohit Agarwal, Tax Director at PwC India

The Indian government on June 22 issued important guidance relating to computation of tax liability, applicable tax rates, and related compliance once a foreign company’s ‘place of effective management’ (PoEM), and thus the company’s tax residence, is determined to be in India.

The India PoEM concept was introduced in the domestic laws with effect from April 1, 2016; it provides that a foreign company shall be regarded as resident in India for tax purposes if the control and management of its affairs are effectively situated in India during a year.

PoEM is an internationally accepted concept to determine the residence for the purposes of tax treaties (including those signed by India) and is also provided for in the OECD’s Model Tax Convention. These rules were added to Indian law to curb shifting of profits to shell companies outside India if effectively managed from India.

New India PoEM guidance

The new guidance addresses how to prepare financial statements in case the accounting year of the foreign jurisdiction does not end on 31 March; computational aspects relating to a depreciation claim; adjustments of carried forward losses and unabsorbed depreciation; eligibility to avail of the foreign tax credit; and other matters.

An important clarification indeed provides that the tax rate applicable to such foreign companies would be 40% (plus surcharge and cess).

Thus, under India’s POEM regime, even though the foreign company would be subject to tax on its global income (like a domestic company), it still must pay tax at a higher rate of 40%, which is applicable to companies other than domestic companies.

The guidance has surely addressed many doubts about the practical challenges associated with the India POEM regime.

However, there are still some areas which require immediate attention of the government for smooth implementation. 

The notification is retrospectively applicable and it remains to be seen as to how the same can be applied to the tax filings already made for the year ending March 31, 2017.

Also, while the government has made an effort to provide a certain tax regime, it has perhaps taken a bit too much time to release the final guidelines. It is likely that few open issues may pose a difficulty for the taxpayers and may ultimately get settled by the courts.

India PoEM rules

In the Indian context, initially, there were a lot of concerns regarding the implementation of the POEM rules, related to both the determination of PoEM as well as the procedural aspects that assume importance once POEM is found to be in India.

The Indian government has adopted an interactive approach, releasing a series of draft notifications and guidelines for public consultation.  Final guidelines have been released to facilitate the ease of implementation and avoid future litigation, taking into account this feedback.

To provide relief and avoid hardship for the companies engaged in bonafide business activities outside India, it was provided that tax officials must obtain prior approval of the senior tax officer before invoking POEM rules. It was also provided that smaller companies with turnover of less than INR 50 cr (USD 7.5 mn) shall not be covered under the rigor of POEM.

Aditya Goel, Manager, Corporate and International Tax at PwC India, assisted with this article.

— Mohit Agarwal, Director, Corporate and International Tax at PwC India, is an Indian CPA with more than 10 years of experience in advising multinational clients on corporate and international tax issues. He can be reached out at [email protected] or +91 9891868905.