Ahead of the Budget Session, the Central Board of Direct Taxes has issued final guidelines for determining the place of effective management (PoEM) of a company. It is effective from 01.04.2016, and accordingly shall apply from assessment year 2017-18 onwards. The move defies expectations that the government may do away with PoEM.
The guidelines however, have been incorporated with several unique features and provide a number of safeguards to address the concerns of the industry, including restricting application to those with turnover above Rs.50 crore. It has been ensured that Indian multinationals with units abroad and Indian companies that are genuinely engaged in business operations outside India are not covered under the guidelines.
The CBDT clarified that the intent is to target shell companies and companies that are created for retaining income outside India although the real control and management of affairs is located in India and not to target Indian multinationals that are engaged in business activity outside India.
The guidelines further provide the ‘active business outside India’ (ABOI) test for determining whether the company is engaged in active business outside India. For this purpose, the average of the data of the previous year and two years prior to that shall be taken into account. In case, the company has been in existence for a shorter period, then the data of such period shall be considered. Where the accounting year for tax purposes, in accordance with laws of country of incorporation of the company, is different from the previous year, then, data of the accounting year that ends during the relevant previous year and two accounting years preceding it shall be considered.
As per the guidelines, the place of effective management in case of a company engaged in active business outside India shall be presumed to be outside India if the majority meetings of the board of directors of the company are held outside India. However, if on the basis of facts and circumstances, it is established that the Board of directors of the company are standing aside and not exercising their powers of management and such powers are being exercised by either the holding company or any other person(s) resident in India, then the place of effective management shall be considered to be in India.
The guiding principle for determination of PoEM would be a two-stage process i.e., determining the place where key decisions are taken and identification of the people taking such decisions. It has, however, been clarified that the place where management decisions are taken would be more important than the place where such decisions are implemented. However, the CBDT has enumerated a number of sub-factors to be considered before the identification of PoEM.
The CBDT also stressed on the fact that these guidelines are not intended to cover foreign companies or to tax their global income, merely on the ground of presence of permanent establishment or business connection in India.
It further stated that it is mandatory for the assessing officer (AO) to seek approval from Principal Commissioner of Income Tax/Commissioner of Income Tax, before initiating an inquiry for PoEM, in a case of a taxpayer. The AO also has to obtain approval from the Collegium of Principal Commissioners of Income Tax before holding that PoEM of a non-resident company is in India.
The guidelines also contain illustrations to clarify the situations whether PoEM shall or shall not apply.
Place of effective management (PoEM) is an internationally recognised test for determination of residence of a company incorporated in a foreign jurisdiction. It works to check companies who set up shell subsidiaries abroad to evade taxes.
Most of the tax treaties entered into by India recognises the concept of 'place of effective management' for determination of residence of a company as a tie-breaker rule for avoidance of double taxation.
The concept of PoEM for deciding the residential status of a company was introduced by the Finance Act, 2015.
Read the Circular here.
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