Indian cos with foreign units fear domestic tax implications : 29-09-2020

Mumbai: Many Indian companies with foreign subsidiaries whose directors or senior executives are stranded in India due to the pandemic are now worried that they may have domestic tax implications under the place of effective management (PoEM) rule. Under the PoEM regulations, overseas subsidiaries could be treated as domestic entities for tax purposes if they are controlled and managed from India. In most cases, senior executives would travel to other countries where the subsidiaries are located, for some time every year, especially for board meetings. However, amid Covid-19, many executives and directors are now unable to travel – resulting in a situation where tax officials could construe that the decisions concerning the companies were made in India.

As it stands today, the Indian government has not announced any relaxations under PoEM for such cases, tax experts said. “In this ‘exceptional’ Covid scenario, an unintended side effect of the lockdown might trigger PoEM presence of foreign companies when their directors/managers, i.e. the key decision makers, are in India,” said Amit Maheshwari, a partner of CA firm Ashok Maheshwary & Associates. “The IT department can consider these companies as residents in India. While the OECD (Organisation for Economic Co-operation and Development) categorically states that this exceptional period should not be considered while determining PoEM, a relaxation from the CBDT (Central Board of Direct Taxes) on the same lines is very necessary to address the same,” Maheshwari added.

The government had introduced the PoEM framework in 2018, to tax the income of Indian companies’ foreign subsidiaries. Amid the pandemic, many companies are holding meetings over videoconferencing applications to take decisions. This raises questions over the taxability of their global income. “For many companies, the decision makers are stranded in India for a long time and the fear is that they may have to pay taxes on their global income in India or foreign companies may become resident under PoEM,” said Paras Savla, a partner at tax advisory firm KPB & Associates.

The tax applicable on the global income of such companies could be as high as 42%, said tax experts. Worse, most of the companies would have to cough up this amount in the coming months and pay that as advance tax.

The problem has occurred for both multinationals as well as individuals. ET had first written on April 11 that for several rich Indians, who shuffle between countries to avoid staying in India beyond the stipulated time to pay tax here, Covid-19 has come as a double blow, as they may have to pay tax in India. For several multinationals too this could create problems, as the tax department could look at whether they could be taxed on their entire income in India.

Industry trackers said the tax department could trigger PoEM despite a recent directive from the OECD that asks countries to provide relief from regulations due to the Covid-19 situation. Tax experts said while some of the larger companies might not face any problems from it, smaller companies, that do not have an independent board or other things to establish independence, would face issues.

Soure : PTI