A Grey POEM -CA Isha Gupta
If you are a global technology company, Bangalore could be the logical place to set up your Asian regional office. But the moment you set up an office, tax collectors will use the new POEM (Place Of Effective Management) Rules to send you a bill to pay taxes on your company’s income from all Asian countries..!!!…If you are a global technology company, Bangalore could be the logical place to set up your Asian regional office. But the moment you set up an office, tax collectors will use the new POEM (Place Of Effective Management) Rules to send you a bill to pay taxes on your company’s income from all Asian countries..!!!…
The Finance Act,2015 amended the provisions of section 6(3) of Income Tax Act relating to determination of residence of a company. According to the amended provisions, a company is said to be resident in India in any previous year, if
(a) It is an Indian Company, or
(b) Its Place of Effective Management(POEM) in that year is in India.
The intent behind this amendment was to ensure that companies incorporated outside India but controlled from India do not escape taxation in the country and to bring the concept of residency of corporate with globally accepted principles.
CBDT has issued draft guidelines last month to be followed in POEM. These draft guidelines were aimed to plug tax avoidance by multinational companies (MNC’s) Indian or Foreign. According to the draft guidelines a company will be liable to pay tax in India if those who take key decisions conduct most of their meetings in India even if the decisions are implemented in another tax jurisdiction. The proposed rules might force MNC’s to locate their regional controller offices outside India. These guidelines would apply to company whose operations are outside India but are controlled by Indians or could apply to foreign companies with regional control centre in India.
Lets take an example—Suppose there is H Co. situated in India with subsidiary in United States(US). Suppose it has raised money from share holders to be utilized for a business run by its United States Subsidiary. The holding Co. would have to ensure that investment goes into that business only. Even such decisions might go into deciding POEM(Place of Effective Management). These decisions should not form part of POEM because Holding Company will have to keep reviewing whether investments are going in right direction or not. Such decisions do not make H Co. a controller or manager of subsidiary. However the recent draft guidelines do not specifically say thee decisions would be out of POEM. The Guidelines say “If on the basis if facts and circumstances it is established that Board of Directors are standing aside and not exercising their powers of management and such powers are exercised by Holding Company or any other person resident in India then POEM shall be in India”
Furthermore, guidelines state as follows:-
“A company shall be deemed to be engaged in active business outside India if following conditions are satisfied—
(1) Passive Income is not more than its total income and
(2) Less than 50% of total assets are situated in India, and
(3) Less than 50% of total number of employees are situated in India or are resident in India, and
(4) Payroll expenses incurred is less than 50% of total payroll expenditure.
For the purpose of determining whether the company is engaged in active business outside India the average data of the previous year and two years prior to that year shall be taken into account. In case the company is in existence for shorter period, data of such period should be considered.”
Whereas passive income includes income from transactions with related parties, royalty, dividend, capital gains, interest income and the like. Income earned from trading between Indian Company and Foreign subsidiary will be covered under passive Income which is not justified. The complications and complexities of such rules can be understood from the following example:-
A Indian Co. sells its product which costs Rs. 80 for Rs. 100 to its Foreign subsidiary. Foreign subsidiary further incurs marketing cost of Rs. 6 on the product & sells it for Rs.110. Foreign subsidiary makes a profit of Rs.4 on the product which will be taxed in India because Passive Income which is Rs. 20 is more than 50% of total Income i.e. Rs. 24 making the POEM in Indian and therefore tax is levied on global income of the company.
Ideally subsidiary can take credit of tax but it is not that simple.
There is significant risk of double taxation especially in case of U.S. companies managed from India since India-U.S. treaty does not recognize POEM & such company might not be able to claim treaty relief.
Further more when foreign companies are treated as Indian Residents according to the amended Section 6(3) , the consequences will be as under.
(i) All these foreign companies will have to file their regular income-tax returns in India. They will have to obtain Indian PAN.
(ii) Their global incomes will be taxable in India. The companies have to pay advance tax and self-assessment tax as applicable.
(iii) They will have to maintain regular books of accounts, vouchers and documents like any other Indian resident companies. It will be no use to say that in the country of its incorporation, the accounts are not required.
(iv) These companies will have to get their accounts audited – statutory Audit, Tax Audit and where applicable – Transfer Pricing Audit. All these reports have to be submitted to Indian CIT. Again, roblox robux hack it will not be an excuse to say that in the country of its incorporation, audit is not required.
(v) These companies have to obtain TAN and comply with Indian TDS requirements.
(vi) Several other anti-avoidance provisions will apply. For example, cash expenses will be disallowed, loans taken or repaid in cash will be considered as taxable income; excessive remuneration to relatives of people substantially interested in the company will be disallowed, Section 2(22) of the ITA – deemed dividend will apply and so on.
To conclude, through the intent behind the provisions may be justified, yet the implementation would lead to much ambiguity & lead to unwanted litigation. A more listing of parameters at grassroot level might be necessary to ensure minimal conflict in implementation. The guidelines should be framed in a method that they do not interfere with the intent of the companies to establish their regional offices in India.