In a bid to remove the ambiguity around the previously instituted guidelines around determination of Place of effective management (POEM) of a company, the government of India has proposed new draft regulations that shall guide the process for such determination.
Place of effective management was described in section 6(3) of the act as a place where “the key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are made.” This definition leaves a lot of room for interpretation and has caused a lot of debate amongst key stakeholders in global businesses who do business with India.
As per the draft guidelines a number of approaches may be used to determine the place of effective management of a company. For example, the guidelines propose that the place of effective management of a company engaged in active business outside India shall be presumed to be outside India provided the majority meetings of the board of directors are held outside India. For companies who are not engaged in active business outside India, the place of effective management (POEM) shall be determined by:
- Identifying persons responsible for making key management and commercial decisions for the conduct of the company’s business as a whole , and;
- Determining the place where such decisions are in fact being made.
For this purpose a company is said to be engaged in active business outside India if its passive income is not more than 50% of its total income and note more than 50% of its assets and employees are situated in India. The company should incur less than 50% of its total payroll expenditure on such employees.
Passive incomes are defined to be the aggregate of incomes from transactions of sale/purchase of goods with associated enterprises as well as incomes by way of royalty, dividend, capital gains or rent.
The draft guidelines call for the use of financial data for the previous three years to determine status as far as active business status is concerned.
The draft guidelines also mention the location of a company’s head office to determine the place of effective management of a company. Head office in this case is defined to be the place where the senior management (MD, CEO, CFO, COO and other department heads) are located. In the case of decentralized businesses such head office would be deemed to be the place where such senior managers are predominantly based, return to following travel to other locations or where they meet when formulating strategies for the group as whole.
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It is our opinion that the draft guidelines muddle the picture even further insofar as an accurate determination of the place of effect management is concerned. There is no single standard or a sequence of rules to ascertain the true PoEM for the purposes of levy of tax. In such a scenario alternate views and judgment based calls will emerge. The presence of a judgment based system of determination of residential status for tax purposes is not conducive for the establishment of a genuine rules based regime. The government should either go ahead with the “active business outside India” approach or hone the “head office” approach further to establish concrete criterion which can be used to determine the true PoEM else tax payers will be saddled with double taxation and extensive litigations on this account.