Place of Effective management – 1990’s has been regarded as a watershed event in the economic sector of India. Various reforms had been introduced at that point of time and the financial sector changed its direction. Since then the Indian regulatory system have been experiencing constant change and reform.
The Indian system had in latest introduced Goods and Services, Integrated Child Development Services, Indian Accounting Standards. India along with these services introduced Place of Effective Management in its Finance act, 2015 which came into assessment in the year 2015.
Definition of Place of Effective Management
Under Place of effective Management or POEM for short, a company would become a resident of India if it was an Indian Company, or during that year its operation, control and management were being handled in India.
As per the provision of Finance act, 2015 the company whose effective management is taking place in India will be considered as resident of India. In layman’s language Place of effective management would be where key managerial work and commercial work which is key for the conduct of business of an entity in whole.
Internationally the concept of POEM is not new but in India it is a relatively a new concept. Hence, if a foreign company is found to have its Place of effective Management in India, it would have its own set of tax complications. The introduction of POEM, thereby assumes larger significance to foreign company having nexus with India, especially Indian MNCs having outbound investment.
What was the need of Place of Effective Management?
The finance act, 2015 introduced the concept of Place of Effective Management to determine the tax residency of foreign Company in India.
Further, the finance bill has set out guiding principles in its memorandum that has to be followed for determining the POEM of a company in India. The circular by income tax department on introduction of POEM entails various factors but signs off by saying that principles are only for guidance, leaving the entire law and circular for interpretation.
One such interpretation of POEM and its effective working is laid down below:
- The entire year should be considered for determining POEM in India. The determination should see where the key commercial, managerial control effectively takes place.
- The guidelines should define the terms key, managerial, effective management clearly in order to avoid ambiguity to people.
- Place of effective management is circumstantial specific based concept and all the relevant circumstances and facts should be examined on case by case basis.
- If a foreign company is resident in India on account of POEM in India then is must be eligible to claim Federal Trade Commission (FTC) in respect of taxes paid in foreign jurisdiction which is doubly taxed.
How do you determine the place of effective management?
The determination of POEM would be based on facts as to whether the company is engaged in active business outside India. (ABOI)
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If a company is engaged in ABOI
POEM (Place of Effective Management) of company who is engaged in active business outside India would be presumed outside India if the majority of the meetings of board of directors of the company are held outside India.
But, if board of directors are standing aside and not exercising their powers of management and control and that power is exercised by any person residing in India, then the place of effective management would be in India.
If a company is not engaged in ABOI
If a company is not engaged in active business outside India, the determination of Place of effective management would be done in two stages:
- Identify the person/s who make the managerial and commercial decision for the conduct of company’s business.
- Determination of place where these decisions are made de facto.
The reason for introduction of Place of effective management in India is to use it as a factor for determining the residency of foreign companies. The POEM or place of effective management has crucial impact on MNCs where the decisions are taken for foreign entities are not merely ratified but majorly taken by officials in India. Moreover, multinational groups having common directors on board of foreign or India enterprise would be susceptible to the applicability of place of effective management in India.
The principles established by the CIRCULAR NO. 6 OF 2017[F.NO.142/11/2015-TPL] for determination of POEM are not decisive itself but in the nature of ambiguous guiding principles.
Thus, lack of any definitive guidelines for POEM or any other law would lead to several tax disputes and POEM as such would become a hot topic of litigation in India and would never take off as is intended.
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