COVID-19 thwarts tax planning for several rich individuals and promoters

MUMBAI: For several rich Indians who shuffle between countries to avoid staying in India beyond stipulated time or operate foreign subsidiaries through creative structures as part of their tax planning, Covid-19 has come as a double blow.

As these individuals and promoters are stranded in India due to Coronavirus, it is set to impact the way Indian revenue authorities tax their individual as well as their foreign subsidiaries’ income.

From the point of personal income tax, an individual staying in India for more than 120 days changes the fact pattern of which country has first right to tax the individual.

In many cases some of these NRIs would stay in Dubai, Luxemburg, Hong Kong and Singapore to reduce their stay in India.

As per the current regulations if an individual stays in India for less than 120 days, then domestic tax is not applied. High net worth individuals often planned their stay in a way that they spent a substantial part of the year flitting between tax havens.

Now stuck in India due to travel restrictions, these individuals are in danger of exceeding the number of days’ presence in India and thereby being considered a resident of India for tax purposes.

On the other hand in several cases when the key decision maker of a foreign subsidiary or a foreign registered company is in India, and continues to make crucial decisions from India, it could trigger Place of Effective Management or POEM issues.

Under POEM overseas subsidiaries are treated as domestic entities for tax purposes if they are controlled and managed from India.

“For several companies whose key decision makers or promoters are stranded in India on account of Coronavirus getting taxed under POEM is a real risk. Especially for several companies that have subsidiaries in the Middle East and the promoter is unable to go there and take meetings, tax department can question why taxes shouldn’t be paid in India even on foreign subsidiaries’ income, as all key decisions were taken domestically,” said Girish Vanvari, founder of tax advisory firm Transaction Square.

Industry trackers say that taxman can trigger POEM despite a recent directive from the OECD that asks countries to provide relief from regulations due to Covid-19 situation.

Tax experts say that while some of the larger companies may not face problems from POEM, but smaller companies, that do not have an independent board or other things to establish independence, would face issues.

Many of these individuals have now reached out to their tax experts to figure out a way. In some cases a rag tag board is being put in place in the foreign subsidiaries to establish independence. Some of their HNIs are now reworking their travel plans to minimise their stay in India and rush back to foreign locations to escape personal income tax scrutiny.

“The rich individuals could face trouble both due to them breaching the physical presence test threshold for residence and having a place of effective management of their foreign company in India, the income of their offshore business could be considered taxable in India,” said a senior lawyer close to the development.