India Adopts Place Of Effective Management Concept
India has amended section 6 of the Income Tax Act to introduce place of effective management (POEM) as the test to determine the place of residence of companies in the country.
The change was included Finance Act, 2015, which received the President’s assent on May 12, 2015. The change will take effect from April 1, 2016, and will, accordingly, apply from the 2016/2017 year of assessment.
Under the amended law, a company shall be considered resident in India in any previous year, if it is an Indian company; or its POEM, in that year, is 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.
Under the existing provisions, a company is said to be resident in India in any previous year, if it is an Indian company; or during that year, the control and management of its affairs is situated wholly in India. Due to the requirement that whole of control and management should be situated in India, and that too for whole of the year, these conditions are seldom met and easily avoided.
A Memorandum published by the Ministry of Finance alongside Budget 2015 explained: “A company can easily avoid becoming a resident by simply holding a board meeting outside India. This facilitates creation of shell companies which are incorporated outside but controlled from India.”
“POEM is an internationally recognized concept for determination of residence of a company incorporated in a foreign jurisdiction. Most of the tax treaties entered into by India recognize the concept of POEM for determination of residence of a company as a tie-breaker rule for avoidance of double taxation. Many countries prefer the POEM test to be appropriate test for determination of residence of a company.”
“The modification in the condition of residence in respect of company by including the concept of [POEM] would align the provisions of the Income Tax Act with the Double Taxation Avoidance Agreements entered into by India with other countries and would also be in line with international standards. Since POEM is an internationally well accepted concept, there are well recognized guiding principles for determination of POEM, although it is a fact-dependent exercise. However, it is proposed that in due course, a set of guiding principles to be followed in determination of POEM would be issued for the benefit of the taxpayers as well as [the] tax administration,” it continued.