Place of Effective Management (Poem) – SK Patodia

Place of Effective Management (Poem)

The Finance Act 2015 has amended the test for determining the residency for companies and introduced the concept of Place Of Effective Management (POEM). As per this concept, a company is said to be a resident in India if its POEM in the previous year is in India. Earlier residency was dependent on the control and management of its affairs is situated wholly in India.

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”.

The three important points that needs to be emphasized upon

Key Management and Commercial decisions: Strategic decisions of company taken by Top Level Management or executive board of the company. Decision which impacts business and which has current or future commercial impact.

“as a whole”: as per judicial dictionary means taking the totality of the matter in respect of which the appellant was being dealt with. It means all parts and aspects considered i.e. everything taken altogether.

 “in substance made” : The term depicts that the legal form is disregarded and substance is considered over form.

 Company other than Indian company having POEM in India, it is said to be resident in India and worldwide income of such company shall be taxable in India.

Corporates needs to meticulously assess the provisions in order to avoid litigation and colossal tax liabilities.

 Company other than Indian company having POEM in India, it is said to be resident in India and worldwide income of such company shall be taxable in India.

Corporates needs to meticulously assess the provisions in order to avoid litigation and colossal tax liabilities.

 Company other than Indian company having POEM in India, it is said to be resident in India and worldwide income of such company shall be taxable in India.

Corporates needs to meticulously assess the provisions in order to avoid litigation and colossal tax liabilities.

the company is resident of both contracting states then it shall be considered as resident where place of effective management is situated. Also, concept of POEM is also commonly used in article 8 pertaining to Shipping and airline business.

Impact

The government believed that the previous conditions were practically inapplicable and contended that they can be easily subverted by simply holding a board meeting outside India, leading to the creation of shell companies, which are incorporated outside but controlled from India. However, the change also will involve practical difficulties as under:

  1. Consequences for Indian MNCs.
  • – Delegation of power to an independent board abroad, may increase compliance cost.
  • – If POEM of Foreign subsidiary of Indian company is determined it will have to pay tax back home in India (if key decisions taken in India, or KMP like a director resides in India)
  • Overseas subsidiaries created for fund-raising and not having any operations of their own, may be impacted.
  1. Consequences for Foreign MNCs
  • – Foreign companies with legitimate business operations outside India be subjected to tax in India on their global income if, for example, a board member of the foreign company is present in India and participates in the decision-making process from India only in that single board meeting.
  • – This anomalous situation will result in double taxation of income which may not be mitigated by tax treaties as both countries (viz. India and the country of incorporation) will seek to tax the global income of the foreign company.

    OTHER AREAS OF LITIGATION IN DETERMINING POEM IN INDIA:

     Videoconferencing: Practically senior managers adopt conferencing through Internet, located throughout the world. In such case determining POEM is challenge.

  • Mobile POEM: MD of the company is constantly on the move and has to make decisions in some extreme circumstances while in different jurisdiction. Or BOD decides to arrange to meet in different office of the enterprise around the globe on rotational basis. This can also lead to an enterprise having a Mobile POEM.
  • POEM in multi-jurisdictions:Sometimes characteristics of effective management exist in number of jurisdictions without single jurisdiction being dominant. Thus POEM test fails to provide a clear allocation of residence to one country, albeit it may be an ineffective rule.
  • POEM was introduced to bring Indian taxation in line with the global standards. China, Brazil, Italy, South Africa, Singapore and Russia has the concept of POEM in their respective Tax Structure. UK and Germany still doesn’t have the concept of POEM in their tax regime.
  • Other areas like MAT applicability and transaction with the foreign related subsidiary of Foreign company may be subjected to Transfer pricing in India

    Conclusion:

    • It has become vital for foreign JV/WOS of Indian entities to review corporate decision making process.
    • Documenting the process and demonstrate adherence thereto in substance at the ground level is important.
    • Having an Independent BOD, Place of meetings, clarity on key role be defined.
    • With increased future litigations foreseen factors provided in the OECD and UN model commentary could be meticulously considered.