Income Tax Update: Routine functions won’t make MNCs liable to pay Indian tax

CBDT says Routine administrative functions carried out from a regional headquarters will not lead to a PoEM in India since such functions do not constitute a case where the board of directors stands aside.

Central Board of Director Taxes (CBDT) has issued a circular dated 23rd October, 2017 clarifying with respect to guidelines for establishing 'Place of Effective Management (PoEM)' in India.

India’s apex direct taxes body has clarified that routine administrative functions carried out from a regional outfit of a multinational company, including handling of payroll, accounting and human resources, will not make it liable to tax on income earned outside the country. The move addresses a key concern of multinationals. 

There had been concerns that multinationals having regional offices in India where employees handle various administrative functions for multiple countries within the region would trigger an Indian place of effective management, or PoEM, making the firm liable to Indian tax. The Finance Act, 2015, provided that a company would be considered a resident in India in any previous year if it is an Indian company or its place of effective management in that year is in India. 

Previously, according to Section 6 (3) of the Income-Tax Act, 1961, a company was said to be a resident in India in any previous year if it was an Indian situated wholly in the country. This was amended by the Finance Act. The latest guidelines from the Central Board of Direct Taxes (CBDT) help determine the place of effective management (PoEM). 

The guidelines provide that where the board of directors 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 now clarified that routine administrative functions carried out from a regional headquarters such as payroll, accounting, HR, routine banking, etc. will not lead to a PoEM in India since such functions do not constitute a case where the board of directors stands aside, according to a circular.

However, such regional headquarters should be functioning according to the global policies of the parent entity and should not be specific to any entity or group of entities, the circular said. Tax experts welcomed the clarification from CBDT.

Source: The Economics Times

You can find below a copy of Circular dated 23rd October, 2017 in this regard.