Place of Effective Management rules target shell companies

New Delhi, Jan 24 (IANS) Foreign companies operating in India will remain outside the purview of the rules for determining place of effective management (PoEM) that will come into effect from the next fiscal, while companies outside India engaged in active business are also exempt, the government said on Tuesday, adding that PoEM will not apply to firms with turnover of Rs 50 Crore or less in a year.

PoEM rules for determining the place of effective management of a company, in order to assess its tax liability, was to come into effect in the current fiscal, but was deferred till April 1, 2017, to allow companies sufficient time to prepare accounts according to their place of residency under the new norms.

"It is emphasised that these guidelines are not intended to cover foreign companies or to tax their global income, merely on the ground of presence of permanent establishment or business connection in India," a Finance Ministry release here said.

"The PoEM guidelines shall not apply to companies having turnover or gross receipts of Rs 50 Crore or less in a financial year," it said

"Active Business outside India (ABOI) test has been provided, so as not to cover companies outside India which are engaged in active business. The intent is not to target Indian multi nationals which are engaged in business activity outside India.

"The intent is to target shell companies and companies which are created for retaining income outside India although real control and management of affairs is located in India," it added.

Earlier income tax rules allowed tax avoidance opportunities for companies "to artificially escape the residential status provisions by shifting insignificant or isolated events related with control and management outside India," said a Central Board of Direct Taxes (CBDT) circular here.

Indian companies started setting up small subsidiaries in tax havens and vest superficial control of their international operations in them to avoid paying taxes on overseas operations, and only paid taxes on Indian operations.

Under the PoEM rules amended by the Finance Act, 2015, a company's global income will be eligible for taxation in India if its effective management and control was situated in India "at any time" during a year instead of throughout the year.

Finance Minister Arun Jaitley had, in his Budget for the current fiscal, announced that PoEM will be implemented from April 2017.

Commenting on the development, international accounting firm KPMG in India's Head of Tax Girish Vanvari said in a statement: "The much awaited PoEM guidelines released today stresses on substance over form. It attempts to differentiate between shareholder control, management control and routine decisions."

"In the final guidelines the CBDT has provided adequate safeguards to ensure that PoEM guidelines does not become an oppressive tool in the hands of revenue to harass genuine assessees," said Rakesh Bhargava, Director, Taxmann.

"Now an Assessing Officer can ascertain the residential status of foreign company on the basis of PoEM guidelines only after taking two-stage approval," he added.