Place of Effective Management (POEM) – Not a Poem, to Many Ears

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.