PLACE OF EFFECTIVE MANAGEMENT
The concept of place of effective management was introduced in the finance bill 2015 for determination of residential status of company.
So, before introduction of concept of POEM how residential status of company was determined? and under which section residential status was determined?
Thus, initially, a company would have been considered as a resident in India provided the control and management of its affairs were wholly situated in India. Thus, it provided an opportunity for the companies to avoid tax by shifting insignificant or isolated events related to control & management outside India.
For instance, since the initial provision provided for the entire control & management to be outside India and that too for the entire year, the companies would often hold a few meetings outside India to escape the applicability of the residence rule, thus eluding the taxation in India.
What Is POEM?
POEM refers to a place where the key management and commercial decisions necessary for conducting a company's business activities are made. Since the residential status of any entity is to be determined every year, POEM is also required to be determined yearly.
The CBDT issued POEM guidelines by way of CIRCULAR NO. 6 OF 2017 [F.NO.142/11/2015-TPL] dated January 24, 2017, for the purpose of determination of POEM
However, POEM guidelines shall not apply to companies having a turnover or gross receipts of Rs. Fifty crores or less in a financial year.
The process of determination of POEM would be primarily based on the fact as to whether the company is engaged in active business outside India (ABOI).
Determination of poem
Meaning of 'Active business outside India (ABOI)-
Foreign Co. shall be said to be engaged in ABOI if all conditions are cumulatively satisfied:-
Condition1: Passive Income (income directly from associated enterprise) is not more than 50% of total income &
Condition 2(a): Asset test: less than 50% of total assets situated in India &
Condition 2(b): Employee test: less than 50% of employee situated / resident in India &
Condition 2(c): Payroll expense test: the payroll expenses incurred on such employees is less than 50% of its total payroll expenditure
IMPLICATIONS OF THE POEM
If any foreign company is found to have a POEM in India, the same would lead to the following consequences:
The foreign company would be termed as a resident u/s 6(3) of the Income Tax Act, 1961.
The entire global income of such foreign company would be subjected to tax in India as per Sec 5(1) of the Act.
The rate of tax applicable would be 40% i.e. the rate which is applicable to foreign companies in India. Even though such foreign company is treated as a resident in India, the rate as applicable to resident Indian companies is not made applicable to a foreign company treated as a resident in India.
Other implications are applicable as mentioned in Sec 115JH as mentioned in the transition mechanism.
Key Terms Which Help to Determine ABOI:
- Passive Income: Passive income of a company shall be aggregate of Income from the transaction where both the purchases and sale of goods is from/to its associated enterprise, and Income by way of royalty interest capital gains dividend or rental income
- How to compute the Value of Assets for tax purposes?
- How to determine the number of Employees in an entity?
- What does the term 'Payroll' mean?
- Is there any exemption for the applicability of POEM to any entity?
Note: If an entity is engaged in the business of banking or is a public financial institution, income by way of interest shall not be considered passive income.
It shall be the average of the value of the assets in the country of incorporation of the company at the beginning and the end of each year.
The number of employees shall be the average of the number of employees of the entity at the beginning and the end of the financial year.
The term 'payroll' has been defined inclusively to include the cost of salaries, wages, bonuses, and all other employee compensation, including the employer's related pension and social cost.
Provision of POEM does not apply to a company whose turnover is less than or equal to INR 50 Crores
The following scenarios give an insight into the determination of POEM:
Example 1. Below is the list of companies, determine whether place of effective management is applicable.
Example 2: All the directors of Co. A are residents in India. During the previous year, 5 meetings of the BODs were held as follows: (Assume company is engaged in ABOI)
(i) 2 meetings - held in India.
(ii) 2 meetings - held in Country X.
(iii) 1 meeting - held in Country Y.
Finding: Since the company is engaged in ABOI and the majority of meetings i.e. 3 out of 5 are held outside India, POEM of Co. A would be presumed to be outside India.
Example 3: Determination of active business outside INDIA