Every year the Budget announcement give a lot of anxious moments to many tax payers. This year as no new, but the introduction of the concept of Place of Effective Management, is not only giving anxiety to fellow Indians but has created a huge impact on foreign Companies having regional heads working from India. Presently in addition to all domestic Indian companies, a company is deemed to be a resident in India if, “during that year, the control and management of affairs is situated wholly in India”.
The lawmakers felt that the above definition was prone to abuse and it facilitated creation of shell companies which were incorporated outside but controlled from India. To make sure that the abuse was curtailed to minimum, three changes were proposed in Budget 2015. Instead of the clause “during that year, the control and management of its affairs is situated wholly in India”, the new clause will read “its place of effective management, at any time in that year, is in India”.
Two main amendments have been proposed:
- Concept of Place of Effective Management introduced instead of control and management, where POEM has been defined to mean “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”.
- At any time of the year added in the definition
“Companies with effective control and management in India, at any time during the year would be considered as Resident.”
FM clarified in his speech that the modification in the condition of residence in respect of company by including the concept of effective management would align the provisions of the Act with the Double Taxation Avoidance Agreements (DTAAs) entered into by India with other countries and would also be in line with international standards.
The intent of our Hon’ble Finance Minister seems really noble, but on a deeper analysis of the prescribed conditions, there may be some hidden interpretations, which many companies need to be prepared for. We have done a deep dive into the definition which got us some unanswered queries, namely:
- A Regional CEO is managing South East Asia operations and is based out of Delhi, India. He calls for a regional meeting in Goa and a budget for the year for all the South East Asian countries is prepared. Can this lead to getting all the south east Asian territories, to be considered as Indian company, as they are qualifying under the current definition.
- An Indian company has a subsidiary in a foreign country. One of the board meeting for the subsidiary company happens in India, wherein the business operations of the subsidiary are discussed. Does this make the subsidiary a resident Indian company, as it also qualifies under the current definition? If yes, what happens if the subsidiary is in a country with which India does not have a treaty benefit? Does it get taxed twice?
Though the vagueness in the definition may be removed in due course by introduction of a set of guiding principles, however the administrative hassle of explaining the substance to the learned assessing officer, would always be a challenge.
The Hon’ble finance minister mentioned that the DTC has been ruled out, however he did not realize that the major eye sore in DTC was the concept which he introduced before removing DTC.
We think that companies should thoroughly review the activities being carried out by the key managerial personnel in India, documents signed and other action taken for there foreign entities through Indian. Though the intent of the law is not to tax innocent taxpayers, but administrative hassles have no mention in the law books.