Overview

a. Tax residency test – Place of Effective Management (POEM)

The Indian domestic tax law has been amended to introduce the concept of POEM while determining the tax residential status of a foreign company in India. Earlier, the residential status was determined on the basis of whether or not the foreign company had control and if the management of its affairs was situated wholly in India. Under the new concept, a foreign company is considered to be a resident in India if its POEM, in that year, is in India. This new concept was applicable from 1 April 2015.

b. Income Computation and Disclosure Standards (ICDS)

There is a conflict between the income as per the books of account and the taxable income as computed under the Income-tax Act. Further, the introduction of Ind AS (IFRS converged standards), which permitted voluntary adoption for Financial Year (FY) 2015-16, could raise additional conflict areas while computing the taxable income. To overcome this issue, the Indian Government recently issued 10 ICDS which provides a new framework for computation of taxable income for all taxpayers, following the mercantile system of accounting in relation to income taxable under the head ‘Profits and Gains from Business and Profession’ and ‘Income from other sources’. The new framework is expected to provide consistency in computation and reporting of taxable income and to further reduce litigation and disputes on tax issues. The new framework is applicable with effect from 1 April 2015.

c. General Anti Avoidance Rules (GAAR)

As per India’s income tax law, the GAAR empowers the revenue authorities to declare transactions/arrangement as an impermissible avoidance arrangement, thereby determining and levying taxes as may be deemed appropriate, thereon denying benefits originally claimed (including those under the tax treaty). More and more countries are adopting GAAR to check aggressive tax planning. In India, GAAR is scheduled to come into effect from 1 April 2017.

d. Base Erosion and Profit Shifting (BEPS)

The Organisation for Economic Co-operation and Development (OECD) launched an Action Plan on Base Erosion and Profit Shifting in July 2013. The plan recognized the importance of a borderless digital economy and proposed to develop a new set of standards to prevent BEPS and to equip governments with domestic and international instruments to prevent corporations from paying little or no taxes. The OECD believes that multinationals are able to reduce their corporate tax bill by shifting profits to low or no-tax jurisdictions. Certain profits may also be untaxed as a result of the application of existing international tax rules, which the OECD believes have not kept pace with modern business models. One such example is that of the digital economy which does not require a physical presence in the country where their services are sold; which often means that profits from such sales are not taxed in that country.
OECD had identified 15 specific actions considered necessary to prevent BEPS and has finalized its recommendations thereon or combating international tax avoidance by MNEs. With an objective to expedite and streamline the implementation of the measures developed to address BEPS and amend bilateral tax treaties, it is also proposed to develop a multilateral instrument to be executed between various countries.