POEM: Tuning-in International Best Practices or Striking a discordant note?

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Finance Bill, 2015 proposes to introduce the concept of ‘place of effective management’ (POEM) by amending residency conditions for Companies w.e.f AY 2016-17. A Company shall be resident if a) it is an Indian company or b) if its place of effective management (POEM) is in India at any time of the year. It thus contemplates a shift from the residency condition of 'control and management situated wholly in India'.

Concerns have been expressed on the implications of use of words - "effective management" and ‘any time during the year’. In a quick response though, CBDT officials issued a scope clarification that the intent is to cover companies, who although in India, but who hold meetings / AGMs abroad to circumvent India Tax residency rules. It was further clarified that while Rules in this regard will be framed soon, ‘Effective Management’ means key management and commercial decisions being taken in India.

While the proposed amendment seeks to align the IT Act, 1961 with international standards, will its scope create unintended implications for foreign companies with operations in India? Will it increase hardship and disputes? What framework / guidelines should the Rules specify to ring-fence the application and purpose of POEM?

Ketan Dalal
Managing Partner (West) and Sr partner, Tax and regulatory services, PwC

The genesis of this proposal appears to be in the context of shell / conduit companies, which are subsidiaries of Indian companies; the objective clearly was not in the context of foreign companies (i.e. inbound into India). Accordingly, logically, at a macro level, this critical point needs to be clarified either in the law, or at least through a circular, especially since concerns having been raised of MNCs having one board meeting in India, and triggering possible tax in India ; clearly, it would be recognized that the foreign income cannot, in most cases, have any nexus in India enough to attract Indian tax (to test this hypothesis, imagine a converse  situation where an Indian company has a Board meeting in America and the entire income of the Indian company becomes taxable in US – could this ever have been intended?). Of course, there may be extreme cases of a "pure" foreign company (ie not owned by an Indian company) being controlled from India, one cannot have outlier legislation and obviously, it does not seem that the current proposal is intended anyway for such outlier cases. In any case, the concept of at place of effective management "at any time"...

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Rajendra Nayak
Partner, International Tax Services, Ernst & Young LLP

Countries may differ on the manner in which they choose to set the jurisdiction for tax under the residence principle.  However, there is a degree of consensus on the basic principle that there should be a fairly strong economic nexus with that country. Two basic approaches are used in establishing a personal jurisdictional connection for corporations.  One is to focus on some formal legal connection to the jurisdiction such as incorporation.  The other is to select some economic or commercial connection such as the place of management or principal business location.  Many jurisdictions combine these approaches, treating a corporation as resident if either test is satisfied.

The current definition of a resident company in the tax law is a company incorporated in India, or a company whose control and management is situated wholly in India. The main criticism of this definition is that it has proven subject to relatively simple, formalistic manipulation. In a liberal exchange control environment, and in a world of mobile capital and assets, a relatively low threshold for determining tax residency may have a potential to become a contributing factor to an emigration of financial capital. Indian multi-nationals participating in the...

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Amit Rana
VP – Tax at GE India

I cannot argue with the intent of the Government in proposing Place of Effective Management (POEM) as a criteria for determining the residence of a company.  The Memorandum explaining the Finance Bill rightly points out that the existing criteria is prone to easy abuse – a company otherwise managed and controlled in India can avoid becoming an Indian resident by merely holding one board meeting outside India.  POEM, would certainly avoid this kind of abuse.  It is an internationally recognized criteria including by the OECD and should be a good indicator of residence.  However, there are concerns in the drafting which need to be addressed.  The condition as drafted provides that a company will be an Indian resident if “its POEM, at any time in that year, is in India”.  POEM 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.  It could be argued that the board manages the affairs of the company and hence if a board meeting of a foreign company is held in India even once in a year, the POEM was in...

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K.R.Sekar
Partner Deloitte Haskins & Sells

The definition of POEM as proposed by the Finance Bill 2014 may create unintended hardship to Foreign Companies operating in India. When POEM was first introduced in Direct Tax Code, Industry and Tax Professionals made a detailed representation on definition of POEM as suggested in DTC.  The definition as proposed by Finance Act 2015 is different from the definition as per DTC which is defunct now. The definition of POEM as per Finance Bill 2015 is given below:

For the purposes of this clause “place of effective management” means 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.

The definition of POEM by Finance Bill 2015 is in line with definition of POEM as per OECD guidelines. OECD defines POEM OECD defines POEM as “The place of effective management is the place where the key management and commercial decisions that are necessary for the conduct of the entity’s business are in substance made”

OECD further clarifies that the place where the actions to be taken by the entity as a whole are, in...

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Gautam Doshi
Group Managing Director of Reliance ADAG

The Proposed amendment to Sec.6(3) whereby a company other than an Indian company (which is always considered to be Resident in India) would be held to be Resident in India if “its place of effective management, at any time in that year, is in India”  is in principle a change to an acceptable standard – POEM. It will help to expand the concept of “Residence”. The change will help overcome tax avoidance practices whereby foreign companies which, based on their operations, should really be taxed as Resident escape tax by ensuring that a small part of the control and management of its affairs is outside India.

Of course, the substitution of the test of the whole of the control and management of its affairs by POEM is a move away from an objective, identifiable test to a subjective test. But, this is a price which assessees have to pay because of the actual and / or potential misuse of the objective test. Given that the new test, POEM, is a concept which has been illustrated and understood in many jurisdictions, the price may not be too high. This would also be so, if as is...

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Krishan Malhotra
Head- Taxation at Amarchand Mangaldas

Currently, a corporation qualifies as a tax resident of India in a given taxable year if (1) it is incorporated in India; or (2) during that year, the ‘control and management and of its affairs is situated wholly in India’. The Finance Bill, 2015, substitutes the second test with the POEM.

The existing control and management test rarely brings a foreign company (a company incorporated outside of India) into the Indian tax net. This is because a foreign company’s control and management is seldom wholly situated in India. For instance, a foreign company, having central offices outside India from which no more than parts of the enterprise are managed, would not qualify as a tax resident of India. In comparison, the POEM test is a lower threshold for a corporation’s tax residence. If in the aforesaid illustration, it were established that despite having offices overseas, the foreign company’s ‘management directives are given’ in India, the company would qualify as a tax resident of India.

In all likelihood, the expansion in the corporation’s tax residency test is inspired by a perceived revenue loss arising under the current law. The existing law on tax residence...

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Mukesh Butani
Chairman, BMR Advisors

Finance Bill 2015 proposal to introduce the concept of POEM shall materially alter conditions for determining the residency of foreign incorporated companies. This in turn will directly impact income attribution principles and bring to tax income, which otherwise is not taxable under the extant law.

The concept of POEM was first introduced in the draft Direct Tax Code (DTC) in 2009. The concept of POEM is seen frequently prevalent in domestic legislation of several countries, particularly the OCED member countries. POEM is used as an effective anti -abuse rule to prevent tax payers from taking advantage of liberal residency rules applicable to foreign branches, operating in source countries.

 Experience of OECD nations on POEM is different than for India. Firstly, due to restrictive provisions under Exchange Controls and FDI regulations, limited activities can be undertaken by foreign companies operating in India as branches. Hence, the concept of POEM which would tend to bring income to tax in India under the residency rules (as prescribed under POEM) could be premature. Secondly, bringing POEM as an integral part of source based taxation principles defeats the underlying intent of it being an anti-abuse provision.

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Jeffrey Owens
Renowned tax expert and Former OECD tax policy Director

This change is in line with the POEM concept that is used by many countries and in that sense having India align itself with this standard should lead to less, not more disputes. It acknowledged that POEM is a difficult concept to implement in an environment characterised by modern communication and Technology.

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