NEW DELHI: The Central Board of Direct Taxes (CBDT) on Tuesday issued guidelines on the ‘place of effective management’, or POEM, of a company to determine its tax liability. POEM rules target companies that were set up abroad to retain income outside India but are controlled from India.
These rules will not be applicable to firms with annual turnover of less than RS 50 crore.
“The final guidelines on POEM contain some unique features. Active Business Outside India test has been provided so as not to cover companies outside India which are engaged in active business,” CBDT said in a statement, adding the intent is not to target Indian multinationals which are engaged in business activity outside India.
The modification to the existing norms was necessary as several companies skip tax liability by misusing the guidelines. This will protect the business interests of both global companies having business connection with India or presence here, and Indian multinationals having active business abroad.
The tax department also said that the 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.
“Adequate administrative safeguards have been incorporated in the guidelines by mandating that the assessing officer (AO), before initiating an inquiry for POEM in a case of a taxpayer, will seek approval from Principal Commissioner or Commissioner of Income-Tax. The AO shall also obtain approval from a Collegium of Principal Commissioners of Income-Tax before holding that POEM of a non-resident company is in India,” it said.
In cases of “companies other than those that are engaged in active business outside India”, the determination of POEM will be a two-stage process.
The first stage would be identification or ascertaining the persons who actually make the key management and commercial decision for conduct of the company’s business as a whole. The second stage would be determination of place where these decisions are in fact being made.
“The place where these management decisions are taken would be more important than the place where such decisions are implemented. For the purpose of determination of POEM, it is the substance which would be conclusive rather than the form,” the guidelines said.
The concept of POEM to decide the residential status of a company was introduced by the Finance Act, 2015.