1. CBDT rules on companies’ effective residence: How to read this POEM?

CBDT rules on companies’ effective residence: How to read this POEM?

Long-awaited "place of effective management (POEM)" rules clarify how to identify the actual place from where the business is being controlled. It does not cover firms with an annual turnover of less than Rs 50 crore and all the businesses with active business operations overseas.

By: | Updated: January 24, 2017 5:14 PM
POEM rules determine where the companies’ businesses are being controlled to target shell companies created to evade taxes through overseas subsidiaries. POEM rules determine where the companies’ businesses are being controlled to target shell companies created to evade taxes through overseas subsidiaries.

The government on Tuesday issued clarifying rules on determining the companies’ place of effective management (POEM), in order to target the shell companies that are created to evade taxes through establishing overseas subsidiaries.

However, it excluded from its purview firms with an annual turnover of less than Rs 50 crore and all the businesses with active business operations overseas.

Thus, effectively, Indian companies with genuine business operations abroad and the MNC’s with their units in India are not covered under the POEM guidelines.

POEM is an internationally recognised test for determination of residence of a company incorporated in a foreign jurisdiction. Most of the tax treaties entered into by India recognise the concept of the place of effective management for determination of residence of a company as a tie-breaker rule for the avoidance of double taxation.

Here’s all you need to learn about POEM:

What
Place of effective management is a set of rules and guidelines framed to identify the actual place from where the business is being controlled. According to the guiding principles, “place of effective management” is defined as a place where key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are, in substance, made.

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Why
The intent is to target shell companies and companies which are created for retaining income outside India although real control and management of affairs are located in India. The place where these management decisions are taken would be more important than the place where such decisions are implemented. For the purpose of determination of POEM, it is the substance which would be conclusive rather than the form.

When
The concept of POEM for deciding the residential status of a company is in effect from this financial year beginning April 1, 2016, and accordingly shall apply from the assessment year 2017-18 onwards. It was introduced by the Finance Act, 2015.

Whom
Active Business Outside India (ABOI) test has been provided so as not to cover companies outside India which are engaged in active business.

  • The intent is not to target Indian multinationals which are engaged in business activity outside India.
  • The guidelines are not intended to cover foreign companies or to tax their global income, merely on the ground of presence of permanent establishment or business connection in India.
  • POEM guidelines will not apply to companies having a turnover or gross receipts of Rs 50 crore or less in a financial year.

How

  • Which companies will be considered to be in India: In cases of “companies other than those that are engaged in active business outside India”, the determination of POEM will be a two-stage process. The first stage would be identification or ascertaining the persons who actually make the key management and commercial decision for the conduct of the company’s business as a whole. The second stage would be the determination of place where these decisions are in fact being made.
  • Which companies will be considered to be outside India: The place of effective management in case of a company engaged in active business outside India shall be presumed to be outside India if the majority meetings of the board of directors of the company are held outside India. However, if on the basis of facts and circumstances, it is established that the board of directors of the company are standing aside and not exercising their powers of management and such powers are being exercised by either the holding company or any other person(s) resident in India, then the place of effective management shall be considered to be in India.

Safeguards
Adequate administrative safeguards have been incorporated in the guidelines by mandating that the assessing officer (AO), before initiating an inquiry for POEM in a case of a taxpayer, will seek approval from Principal Commissioner or Commissioner of Income-Tax. The AO shall also obtain approval from Collegium of Principal Commissioners of Income-Tax before holding that POEM of a non-resident company is in India.

 

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