This December Tax Santa brings a nightmare tax poem
# poem tax india
A draft concept of determining Tax residency issued by CBDT on 23rd December 2015 which compelled tax payers to rethink before tax planning.
In a nutshell of draft, you will find that-
“A company said to be a Tax Resident of that country only, where the company sing a PoEM“
*PoEM stands for Place of effective management.
This was done to address tax avoidance opportunities for companies to artificially escape the residential status under these provisions by shifting insignificant or isolated events related with control and management outside India in earlier regime.
As per OECD model Convention, if a person other than an individual treated as a resident of two or more countries, then it shall be deemed to be a resident only of that country in which its place of effective management is situated.
Criteria for Company to be treat as “Resident in India”
Section 6 (3) says, A company is said to be resident in India in any previous year, if
(i) it is an Indian company, in layman words, company incorporated in India (refer section 2(26) of IT Act)
(ii) its place of effective management, in that year, is in India.
What if any company said to be resident in india?
All income earned, accrue or receive anywhere in the world shall be taxable in India irrespective of whether same income is taxable in any other country or not.
*of course, double taxation relief will be available if India has DTAA with such country.
A PoEM may sing either outside or inside India-
Draft concept, divide the PoEM in two category:-
1. POEM of a company engaged in *active business OUTSIDE India
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.
*active business outside India means if the **passive income is not more than 50% of its total income and ,
- less than 50% of its total assets are situated in India; and
- less than 50% of total number of employees are situated in India or are resident in India; and
- the payroll expenses incurred on such employees is less than 50% of its total payroll expenditure ;
**Passive income of a company shall be aggregate of ,-
- Income from the transactions where both the purchase and sale of goods is from / to its associated enterprises; and
- Income by way of royalty, dividend, capital gains, interest or rental income;
2. POEM of a company OTHER THAN one engaged in active business outside India
In cases of companies other than those that are engaged in active business outside India, the determination of POEM would be a two stage process , namely:-
- First stage would be identification of person/s who actually make the key management and commercial decision for conduct of the company’s business as a whole.
- Second stage would be determination of place where these decisions are in fact being made.
In other words, if key management regular meets and makes decision in India then tax residency status shall be treat in India only.
Other key points
- POEM will also be required to be determined on year to year basis as “residence status” is to be determined for each year.
- If Assessing officer proposes to hold a company incorporated outside India, on the basis of its PoEM, as being resident in India then AO has to obtain prior approval of the Principal Commissioner or the Commissioner.
# poem tax india
By CA Pulkit Gupta & CA Ankit Mangla