The Central Board of Direct Taxes (CBDT), on Monday 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.
A recent missive issued by the Board addresses a key concern of multinationals and clarifies the issues relating to recent guidelines issued by the Board for determining the Place of Effective Management (PoEM).
Earlier, 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.
As per the Finance Act, 2015, a company would be considered as 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 company or if during that year, control and management of its affairs was situated wholly in the country.
The Finance act, 2015 changed this position and the latest guidelines from the Board prescribed the procedure for determining the place of effective management (PoEM) as per which, 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.
Now the Board 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.
Read the full text of the Circular below.
