Moneycontrol
Jan 24, 2017 08:07 PM IST | Source: CNBC-TV18

CBDT issues guiding principles on place of effective mgmt of cos

The central board of direct taxes has issued guiding principles to determine place of effective management (POEM) of a company, reports CNBC-TV18. The new guidelines will be applicable from assessment year 2017-18.


The central board of direct taxes has issued guiding principles to determine place of effective management (POEM) of a company, reports CNBC-TV18. The new guidelines will be applicable from assessment year 2017-18.  


The guidelines aim to target only shell companies set up by entities to retain income abroad when place of effective management and control is here in India.


This will also protect genuine business interest of both global companies, having business connection with India or PE presence here, and Indian multinationals having active business abroad.  

Commenting on the guidelines, Dinesh Kanabar of Dhruva Advisors said, this has nothing to do with inbound investment into India. "This does provide clarity that active companies overseas will not be taxable in India," he said.

Below is the verbatim transcript of Dinesh Kanabar’s interview to Nigel D’Souza on CNBC-TV18.

Q: You heard the clarifications coming in – active companies, there is nothing much going to happen to them, but some of those shell companies, they are going to come under the hammer. What is your take on it, clarifications good enough?

A: The place of effective management concept was brought about on the statute in the 2015 Budget and guidelines were to be brought about as to how does one determine whether a place of effective management of an entity is in India or not. The guidelines did not come till the end of the year and therefore the implementation of the place of effective management was postponed by a year.

In March 2016 when the Finance Minister said that he is postponing the implementation by a year, he said we will come out with guidelines. The draft guidelines were brought about somewhere in November and now what we have is the final guidelines which have come about, the final rules to determine where the place of effective management of a foreign enterprise and when is it that it could be said that the place of effective management is in India.

Remember, this has nothing to do with inbound investment into India. This is totally outbound. So, where an Indian company for example has a subsidiary overseas, etc. would that subsidiary be regarded as effectively managed in India or would it therefore be regarded as the tax resident of India liable to tax in India on the global income or not is really the subject matter here.

To your question as to whether this is welcome; obviously the guidelines are welcome. What is not welcome is really the fact that the guidelines should have been issued in the month of April and it is coming in the succeeding January towards the fag end of the year. Sure there were draft guidelines which were announced and the final guidelines mirror the draft guidelines which were issued earlier, and there is nothing wrong at all. I think the concept is absolutely acceptable that if you have a foreign company which is effectively managed in India, it should be regarded as tax resident and liable to tax in India.

What one had also heard really was that the guidelines were never to come because that is what was sort of in one of the press communications which had come out and the issue really was that in the coming Budget, we would have new guidelines which would be CFC or control foreign company guidelines but indeed this does provide clarity that active companies overseas will not be taxable in India. It is only the passive companies which are controlled from India whose income will be liable to tax in India, so, welcome from that perspective.

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