The CBDT has issued Circular No. 06 of 2017 dated 24th January, 2017 which deals with Guiding Principles for determination of Place of Effective Management (POEM) of a Company.
POEM is an internationally recognized Test for determination of residence of a company incorporated in a foreign jurisdiction. In other words, a set of rules will assess tax liabilities of firms.
Definition:
As per 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.
Brief Analysis
1. The POEM rules with an aim to assess the tax liability were to come into effect in the current fiscal.
2. New Concept – The final guidelines on POEM contain a unique feature – Active Business outside India (ABOI) test has been provided so as not to cover companies outside India which are engaged in active business.
3. Earlier, the Central Board of Direct Taxes assured that 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.
Necessity:
The modification was necessary as many companies evade tax liability by misusing the earlier guidelines.
Exceptions: The POEM guidelines will not apply to companies having an annual turnover or gross receipts of Rs 50 crore or less.
Other Key Takeaways:
1. The POEM 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 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.
2. In cases of “companies other than the aforesaid – the determination of POEM will be a two-stage process:
First stage – Identification or ascertaining the persons who actually make the key management and commercial decision;
Second stage – Determination of place where these decisions are in fact being made.
Hence, the place where these management decisions are taken would be more important than the place where such decisions are implemented.
CBDT’s Latest Clarification
The CBDT, in its latest Circular No. 25 / 2017 Dated 23rd October, 2017 clarifies that
Routine administrative functions such as payroll, accounting, human resources or routine banking by the regional headquarters in India of multinationals have been exempted from taxes under the rules on Place of Effective Management (PoEM).
Condition:
Regional headquarters should be functioning according to global policies of the parent entity and not be specific to any entity or group of entities.
Further, if taxpayers used the latest circular for aggressive or abusive tax planning, the General Anti-Avoidance Rule (GAAR) regarding taxes would be invoked.
The concept of POEM was introduced by the Finance Act, 2015.
It is effective from 1st April, 2016, and accordingly apply from assessment year 2017-18 onwards.
The Author is a buddying tax law professional and can be reached at shreetaxchambers@bsnl.in
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