Finance Ministry today suggested two stage process for determining the place of effective management of a company, with a view to assess its tax liability.
According to the draft guidelines, the first stage would be identification of the persons who make the key management and commercial decision for the company and secondly the determination of the place where these decisions are made.
The Central Board of Direct Taxes (CBDT) has invited comments on the six page draft guiding principle for determination of Place of Effective Management (POEM) by January 2.
The modification of the existing norms, it said, is necessary as many companies skip tax liability by misusing the guidelines.
Under the existing norms, many companies "artificially escape the residential status under these provisions by shifting insignificant or isolated events related with control and management outside India.
The draft norms say POEM would mean a place where key management and commercial decisions that are necessary for the conduct of a business or an entity as a whole are in substance made.
The draft norms also distinguishes between active business outside India and passive income for the purpose for determination of POEM.
It said a company will be deemed to be engaged in active business outside India if the passive income (royalty, capital gains, dividend, interest, rental income) is not more than 50 per cent of its total income, less than 50 per cent of its total assets are situated in India, less than 50 per cent of the employees are situated in India and the pay roll expenses on such employees is less than 50 per cent of the total.
The draft guidelines also state that "the place of effective management in case of a company engaged in active business outside India shall be presumed to be outside India if the majority meetings of the board of directors of the company are held outside India."
Guidelines provide factors such as location where a company's board regularly meets and makes decisions, head office location, etc.
It also clarifies that day-to-day routine operational decisions undertaken by junior and middle management shall not be relevant for the purpose of determination of POEM.
While coming out with the guidelines, the CBDT also took into account modern technology impact in POEM determination.
It said the assessing officer will have to take the approval of the Principal Commissioner or the Commissioner before passing an adverse POEM decision.
(Reopens DCM 106)
Deloitte (India) Senior Director Parikshit Datta said the guidelines will help in reducing litigation.
"The CBDT has provided clarifications which should help reduce unnecessary litigation. These guidelines are broadly in line with international principles," he said.
KPMG National Head of Tax Girish Vanvari said some issues need further thinking and some clauses are required to be tightened.
"Many clauses in the guidelines are directional rather than being conclusive, tightening of some of these issues will be required," he said.
PwC India Leader Direct Tax Rahul Garg said the guidelines could have been more illustrative.
"Active income factors to be considered are unreasonably strict as some of them have little relationship with control and management of entity as a whole," he said.
