Regional Head Office in India – Implications Explained

The introduction of the place of effective management' (POEM) test for determining corporate tax residency was a key recent change to Indian taxation laws. The Central Board of Direct Taxes (CBDT) has recently issued Circular (No. 25 of 2017, dated 23 October 2017) (Clarification), yet another clarification to ensure that the new POEM rule is applied smoothly without adversely affecting non-resident taxpayers. Vide the Clarification, the CDBT has clarified the POEM implications of a company having its regional headquarters in India vis-à-vis decision-making by its Board of Directors (Board). Previously, the CBDT had issued the 'Guidelines for the determination of POEM' (Guidelines) as well as the de minimus threshold (INR 500 million of turnover or gross receipts) for the application of the POEM test.

Basic rules for determination of POEM

The Guidelines provide a step-wise mechanism for determining the POEM of a foreign company based on whether the company is engaged in active business outside India. The below diagrammatical representation reflects the key considerations for such determination. Importantly, the determination of POEM is entirely fact driven and the over-arching rule of 'substance over form' will be applied.

The key implication of a foreign company's POEM being situated in India results in its worldwide income being taxed in India and mandate it to adhere to all compliances applicable to an Indian tax resident – indeed an onerous compliance burden and tax cost.

Power of the Board & 'Standing Aside'

The Guidelines state that a critical factor in determining POEM is that (a) the Board should in fact be making key commercial and management decisions, and (b) the Board should not be seen to be standing aside or not exercising their powers of management, with a holding company or other Indian (tax) resident making such decisions in its stead.

However, this rule does not preclude the Board from following general and objective principles of the company's global policy laid down by a parent company in relation to pay-roll functions, accounting, human resources, IT infrastructure etc., essentially routine functions (Global Policy). This would per se not be regarded as the Board 'standing aside', provided such Global Policy is not specific to any entity or group of entities per se.

Head Office & Determination of POEM

The Guidelines state that the location of a foreign company's head office is a very important factor for determining its POEM since it is symbolic of the place where key company decisions are made. Additionally, the Guidelines specify factors to be considered to ascertain the location of the company's head office (e.g. where its senior management and support staff are based, factors in case of decentralised management, etc.)

In this regard, the Clarification states that where a regional head office in India operates for subsidiaries or group companies in a region and follows the Global Policy formulated by the parent entity, would not in itself constitute a case of the Board standing aside. It is now clarified that such activities undertaken by a regional head office in India alone will not be a basis for the company's POEM to be situated in India. This is relevant in cases where MNCs with regional head-offices have their employees working in India with responsibility or oversight over various countries.

Observation on GAAR

As a concluding remark, the Clarification alludes to General Anti-Avoidance Rule (GAAR), effective from 1 April 2017, whereby, the provisions of GAAR shall nonetheless be triggered in cases where the above leeway is found to be used for abusive or aggressive tax planning.

Comments

The Clarification addresses certain concerns raised by taxpayers where POEM may have been said to be situated in India due to ancillary factors, despite the company's Board taking key commercial and management decisions outside of India. This provides some respite and seeks to ensure proper implementation of the POEM rule. However, it is interesting that the Clarification refers to GAAR, despite the Guidelines expressly providing that the rule of 'substance over form' will prevail to determine POEM. This reference may be viewed as the CBDT reiterating the overarching relevance of GAAR to all arrangements or its definitive intention to use GAAR even when specific tax provisions (such as POEM) exist.

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