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