In order to crack down on shell companies, the Central Board of Direct Taxes (CBDT) has issued guiding principles on the Place of Effective Management (POEM) of a Company to determine its tax liability. The new tax rules require foreign firms in India and Indian firms with overseas subsidiaries to pay local taxes based on where the business if effectively controlled.
CBDT has said that the main purpose of introducing POEM is to target shell companies and companies which are created for retaining income outside India although real control and management of affairs is located in India. The tax department further said that this would help target shell companies, or holding companies, incorporated overseas to avoid taxes by showing their residency as a tax haven even though the management and effective decision making takes place in India. It also said the intent is not to target Indian multinationals which are engaged in business activity outside India.
As per the guidelines issued by CBDT, the new rules require company's residency to be determined by persons exercising effective control over decision making and the place where such control is exercised from. The guidelines also included that the place where these management decisions are taken would be more important than the place where such decisions are implemented. It added that for the purpose of determination of POEM it is the substance which would be conclusive rather than the form.
Meanwhile, the long awaited POEM rules are effective from April 1, 2016 and will not be applicable to firms with annual turnover of less than Rs 50 crore. The concept of POEM to decide the residential status of a company was introduced by the Finance Act, 2015.