POEM (Place Of Effective Management)

To determine the residential status of foreign companies, the Finance Act 2015 introduced the concept of place of effective management or POEM. If a company’s place of effective management is India, it will be treated as an Indian resident and its global income will be taxable in India. 

But the criteria to determine the place of effective management were missing and so in Budget 2016 Finance Minister deferred POEM by a year. That is, it would become applicable starting financial year 2016-17.

Why it is needed?

It is an effort to stop tax evasion. India's current tax to GDP ratio is 17% and desired ratio is about 30 %.

In globalized economic system, any corporate can invest in other countries. E.g. A company named X has physical presence in India, also most of its employees are working in India. It has most of its assets in India. But X has setup an office in cayman island (tax heaven) as a parent company. So the taxes should be paid in cayman island. By all this efforts MNCs like X end up paying less taxes and increase their profit margin. Government get less taxes in its kitty.

Guidelines:

Central Board of Direct Taxes has now released the POEM guidelines.

Quantitatively, companies with turnover of Rs 50 crore or less in a financial year will be exempt from the POEM provisions. 

Qualitatively, companies with active business outside India will be exempt from these provisions. The CBDT has spelled out the criteria for the active business test:

• Passive income should not be more than 50 percent of total income, and
• Less than 50 percent of total assets should be situated in India, and
• Less than 50 percent of total employees should be situated in India, and
• Payroll expenses on such employees should be less than 50 percent of total payroll expenditure.

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 decisions are being taken by the holding company or any other person resident in India, then the presumption will not apply, according to CBDT's guidelines.

The CBDT has stated that the intent of POEM is to not target Indian multi-nationals which are engaged in business activity outside India. But the intent is to target shell companies created for retaining income outside India although real control and management of affairs is located in India.