Place of Effective Management POEM

Place of Effective ManagementCompany tax residency rulePOEMBrief Discussion

BY: CA. Gaurav Garg

ContentFinance Act 2015Understanding POEMConsequance

Finance Act 2015Till March 2015, a company not incorporated in India was treated as tax resident only where the control and management was situated wholly in India. This threshold allowed many taxpayers to set-up companies outside India for avoiding taxes in India through proper planning.In order to plug this loophole, Finance Act 2015 has amended provision of Section 6(3) of the Income-tax Act 1961 (the Act) and replaced control and management criteria to Place of Effective Management (POEM).

Finance Act 2015Prior ActA company is said to be resident in India in any previous year, if,-i) It is an Indian company; ori) It is an Indian company; orii) Its place of effective management, in that year, is in Indiaii) During that year, the control and management, of its affairs is situated wholly in India

Finance Act 2015Further, an explanation as been added in the Act, and POEM has been 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 madeThe change is in line with most of the DTAAs signed by India with other countries.

Understanding POEMConcept of POEM is found in OECD Model Convention and the same advocates the use of POEM to decide tax residency, tie-breaker rule, in a case wherein a taxpayers becomes resident of more than one country.POEM is also used to decide taxation of profits from shipping and air transport.Place of effective management refers to actual management over ostensible or formal management. In Commentary on Article 4(3) on POEM, OECD attaches importance to company actually managed over formal criterion like registration.Place of effective management is different from place of management as generally place of management is interpreted as the centre of top-level management, the place where the person authorised to represent the company carries on his business management activities.The term effective implies realistic, positive managementit is where the shots are calledAs per international tax expert Mr. Vogel, for POEM what is decisive is not the place where the management directives take effect, but rather the place where they are given.

Understanding POEMAs per meaning given in the Act, POEM is 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 madeWhere key management and commercial decisionskey management and commercial: idea is not to cover any decision but very important management and commercial decisions. It will not include decisions relating to supervisory functions, or routine decisions taken by lower level management for day-to-day operations.decisions: s at the end, suggests some sort of continuity in decision making function from a place, so merely one time activity will not fall under this concept.Under the Finance Bill initially presented, the definition included the phrase at any time. There was an apprehension that due to this phrase, if the POEM

Understanding POEMis situated in India even for a day, the company will be treated as Indian Resident. However, these words are removed in the final version, it is clear that Government does not intend to cover occasional/ casual decision taking from India.that are necessary for the conduct of the business of an entity as a whole aredecisions should be with regard to entity as a wholea place where decisions are taken only for a part of an entity say branch, manufacturing unit, sales unit etc will not get coveredin substance madeIt is a place where actually decisions are taken and not a place where decisions are minuted or formalised in board meetingIt is also not a place where decisions are implemented

ConsequenceIf POEM is held to be India, a company not incorporated in India would be treated as tax resident companyBeing tax resident company,Its global income would be taxable in India;It need to obtain PAN, TAN, maintain books of accounts and get them audited;It need to compute its taxable income as per the Act and file its income tax return in India; and,All other provisions of the Act would be applicable which are applicable on companies

ContactFor further discussion on POEM and how it can impact your taxability, feel free to contact:CA. Gaurav Garg(E): gaurav@jgarg.com (P): +91 11 47094934(M) +91 9899994934