MUMBAI: The Central Board of Direct Taxes (CBDT) on Wednesday clarified that foreign companies that have their place of effective management (POEM) in India will be taxed at 40%, plus applicable surcharge and cess.
Provisions relating to POEM were applicable from the financial year 2016-17. Prior to this, a foreign company was considered as a tax resident of India, only if the control and management of its affairs were wholly in India during that financial year. Now, if such a company has a POEM in India, it becomes a tax resident of India and has to pay tax in India on its global income.
CBDT has clarified that, “The rate of income tax applicable to the foreign company shall apply, even though the residency status of the foreign company changes from non-resident to resident on the basis of POEM.” This clarification has retrospective applicability from the date POEM came into effect.
Nangia Advisors managing partner Rakesh Nangia said, “The CBDT circular clarifies that the intention of the law is clear, that the provisions which are more beneficial to the resident companies shall not apply to foreign companies becoming a tax resident owing to POEM.” The process of determination of POEM is primarily based on whether or not the foreign company is engaged in ‘active business’ outside India. To meet the ‘active business’ test its passive (non-business) income should not be more than 50% and it should meet certain parameters in terms of employees, assets and payroll expenditure.
The Income Tax Act prescribes corporate tax rates based on turnover slabs. The maximum marginal corporate tax rates — including surcharge and cess — for resident (domestic) companies is 34.94%, whereas for foreign companies is 43.68%. It should be noted that subsidiaries of MNCs in India are domestic companies.
Source: timesofindia.indiatimes.com