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 company or if during that year, control and management of its affairs was
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.