CBDT announces draft norms to determine POEM

The Dollar Business Bureau

The CBDT clarified that a foreign company would not be considered a resident taxpayer even if it is fully owned by an Indian firm

  The Central Board of Direct Taxes (CBDT) on Wednesday released a set of draft principals for determination of Place of Effective Management (POEM) – a move aimed at tightening the tax regime for companies operating in India. As per the guidelines, POEM - an internationally recognised test to determine the residence of a company incorporated in a foreign jurisdiction - would 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 made. The draft stressed that the government would follow a set of principles to determine POEM to benefit the taxpayers as well as the tax administration. For one, the board said, a company should be engaged in “active business outside India” if the passive income is not more than 50% of its total income. Second, less than 50% of its total assets should be situated in India and less than 50% of total number of employees should be situated in India or should be residents in India And third, the payroll expenses incurred on such employees should be less than 50% of its total payroll expenditure. The CBDT also emphasised that a foreign company would not be considered a resident taxpayer even if it is fully owned by an Indian firm, or some of its directors or local management is in India or existence of support functions in the country. The board clarified that a company’s head office would be defined as the place where its senior management and their direct support staff are located or, whether they are located at more than one location, the place where they are primarily or predominantly located. “Any determination of the PoEM will depend upon the facts and circumstances of a given case. The PoEM concept is one of substance over form. It may be noted that an entity may have more than one place of management, but it can have only one place of effective management at any point of time,” the board said.  

December 24, 2015  | 03:20pm IST