The Central Board of Direct Taxes (CBDT) has issued final Notification No. 29/2018-Income Tax Dated: June 22, 2018 in exercise of powers conferred under section 115JH of the Income-tax Act, 1961 (the Act), where a foreign company is held to be resident by virtue of its PoEM in India. The CBDT had earlier issued Draft Notification (notification) vide F No. 370142/19/2017-TPL on June 15, 2017 in this regard.
Following are the changes in the final notification viz-a-viz draft notification
1. Opening Written Down Value (WDV) of asset
With respect to opening WDV in case of the foreign company whose PoEM is determined in India and which is assessed to tax in the home jurisdiction, the final notification provides for 2 cases:
a. where it is required to take into account depreciation for the purpose of computation of its taxable income, WDV of the depreciable asset as per the tax record in the foreign country on the 1st day of the previous year shall be adopted as the opening WDV for the said previous year (provided in draft notification);
b. in cases not covered by (a), the WDV shall be calculated in the manner, as though the asset was installed, utilised and the depreciation was actually allowed as per the provisions of the laws of that foreign jurisdiction and the WDV so arrived at as on the 1st day of the previous year, shall be adopted to be the opening WDV for the said previous year (newly introduced).
2. Brought forward losses and unabsorbed depreciation
In addition to the mechanism provided under the draft notification for brought forward losses and unabsorbed depreciation, the final notification additionally provides that:
a. the foreign company is assessed to tax in the foreign jurisdiction, its brought forward loss and unabsorbed depreciation as per the tax record shall be determined year wise on the 1st day of the said previous year
If the foreign company is not assessed to tax in the foreign jurisdiction, its brought forward loss and unabsorbed depreciation as per the books of account prepared in accordance with the laws of that country shall be determined year wise on the 1st day of the said previous year;
b. The brought forward losses and unabsorbed depreciation shall be allowed to be set off and carried forward in accordance with the provisions of the Act for the remaining period calculated from the year in which they occurred for the first time taking that year as the first year;
c. The losses and unabsorbed depreciation of the foreign company shall be allowed to be set off only against such income of the foreign company which have become chargeable to tax in India on account of it becoming Indian resident;
d. In cases where the brought forward loss and unabsorbed depreciation originally adopted in India are revised or modified in the foreign jurisdiction due to any action of the tax or legal authority, the amount of the loss and unabsorbed depreciation shall be revised or modified for the purposes of set off and carry forward.
3. Where the accounting year does not end on 31st March
The foreign company shall also be required to prepare profit and loss account and balance sheet beginning from 1st April and ending on 31st March (immediately preceding the period when the company is resident on account of PoEM till the year the foreign company remains resident in India on account of its PoEM).
The draft notification provided mechanism only for brought forward losses where the accounting year does not end on 31st March. However, the final notification has also provided for unabsorbed depreciation as well.
In a nutshell, the final notification provides that:
For the purpose of carry forward of loss and unabsorbed depreciation in cases where the accounting year followed by the foreign company does not end on 31st March and the period starting from the date on which immediately following year begins up to 31st March of the year, immediately preceding the period beginning with 1st April and ending on 31st March during which it has become resident, is:
a. less than six months, it shall be included in that accounting year;
b. equal to or more than six months, that period shall be treated as a separate accounting year.
The notification further provides that loss and unabsorbed depreciation as per tax record or books of account, as the case may be, of the foreign company shall, be allocated on proportionate basis.
For example, if the accounting year followed by the foreign company is calendar year, the accounting year immediately preceding the accounting year in which the foreign company is held to be resident in India, shall be increased by three months, i.e., 1st January to 31st March.
If the accounting year followed by the foreign company is from 1st July to 30th June, the accounting year immediately preceding the accounting year in which the foreign company is held to be resident in India, shall be of nine months from 1st July to 31st March.
4. Compliance to provisions of TDS (Chapter XVII-B of the Act)
The draft notification provided that where more than one provision of Chapter XVII-B of the Act applies to the foreign company as resident as well as foreign company, the provision applicable to the foreign company alone shall apply.
In addition to this, the final notification provides that compliance to the provisions of Chapter XVII-B of the Act as are applicable to the foreign company prior to its becoming Indian resident shall be considered sufficient compliance to the provisions of said Chapter.
5. Application under section 195(2) of the Act by payer for lower or NIL withholding certificate
The provisions contained in sub-section (2) of section 195 of the Act shall apply in such manner to include payment to the foreign company
(This remains same as mentioned in draft notification dated 15th June 2017)
6. Foreign Tax Credit
In addition to provision for availability of foreign tax credit under sections 90 or 91 of the Act, the final notification further provides that in a case where income on which foreign tax has been paid or deducted, is offered to tax in more than one year, credit of foreign tax shall be allowed across those years in the same proportion in which the income is offered to tax or assessed to tax in India in respect of the income to which it relates and shall be in accordance with the provisions of Rule 128 of the Income-tax Rules, 1962.
The final notification states that the exceptions, modifications and adaptations shall not apply in respect of such income of the foreign company becoming Indian resident on account of its PoEM being in India which would have been chargeable to tax in India, even if the foreign company had not become Indian resident.
7. Provision applicable to the foreign company as resident v/s provision applicable to it as foreign company
The foreign company shall continue to be treated as a foreign company even if it is said to be resident in India and all the provisions of the Act shall apply accordingly. Consequently, the provisions specifically applicable to:
(i) a foreign company shall continue to apply to it;
(ii) non-resident persons shall not apply to it; and
(iii) the provisions specifically applicable to resident, shall apply to it.
Notification states that in case of conflict between the provision applicable to the foreign company as resident and the provision applicable to it as foreign company, the latter shall generally prevail.
Therefore, the rate of tax in case of foreign company shall remain the same @ 40% (plus applicable surcharge and cess.), i.e. rate of income-tax applicable to the foreign company even though residency status of the foreign company changes from non-resident to resident on the basis of PoEM.
8. Questions Still Unanswered
a. Applicability of tax audit in case the turnover exceeds the prescribed threshold
b. Taxability of dividend received by Indian shareholders of such foreign companies
c. Whether concessional rate of tax (presumptive taxation) would be applicable to foreign companies?
9. Other Points
It has been clarified in the Press Release issued by the CBDT that the PoEM guidelines shall not apply to companies having turnover or gross receipts of INR 500 million or less in a financial year.
As per press release dated 23rd October 2017 CBDT has clarified that routine administrative functions such as payroll, accounting, human resources or routine banking by the regional headquarters of multinationals have been exempted from the rules on PoEM subject to condition that regional headquarters should be functioning according to global policies of the parent entity and not be specific to any entity.
Draft notification dated 15th June 2017 had mentioned that the transitional provisions would also cover any subsequent previous year up to the date of determination of PoEM in assessment proceedings.
For example, let’s say, a foreign company is considered as an Indian resident by the Indian tax authority for the first time for the FY 2016-17. This determination happens only during the assessment proceedings, which happens with a lag, say, in December 2020 (by virtue of limitation rules under section 153 of the Act). In such a case, as per the aforesaid rule, the same rules will also apply to future FYs 2017-18 and 2018-19.
Under final guidelines for determination of PoEM released by CBDT on 24th January 2017 it is mentioned that the process of determination of PoEM would be primarily based on the fact as to whether the company is engaged in “active business outside India”.
Points to Ponder
I. PoEM in a way is beneficial to the foreign company which is determined to be resident in India because foreign tax credit and brought forward losses are allowed as per the specified mechanism
II. Still the question remains if the brought forward loss of Home country is set off in India then will it be again allowed to be set off in Home Country? (presuming the same is not set off in home country)
III. When a foreign company is determined to be PoEM in India will it be still taxed in India if it doesn’t have any permanent establishment in India?