Tax Residency under POEM - fitindia.org › downloads › Tax_Residency_under... · Pranav Sayta Tax Residency under POEM 16 October 2015. Page 2 2 Evaluation of POEM –Practical

CA. Pranav Sayta

Tax Residency under POEM

16 October 2015

Page 2

2 Evaluation of POEM – Practical Insights

Glossary

3

4

Annexures

Contents


1 Corporate Residency and Introduction of POEM

Key Takeaways

5

Page 3

Corporate Residency and Introduction of POEM


Page 4

Corporate Residency - Determination

► Taxation Systems:

► Residence based taxation

► Source based taxation/ Territorial system

► Determination of Residency in case of:

► an individual - Domicile, Citizenship, No of days physical presence

► a company - Place of incorporation or place of C&M

► C&M, Central C&M, Whole/part C&M, C&M wholly, POEM, C&M at any time

during the year, etc.

► Definition of C&M generally not provided though definition of POEM is found to

be provided


Page 5

Corporate Residency – Pre / Post amendment

► A company is said to be resident in India in

any previous year, if -

► It is an Indian company, or,

► Its Place of Effective Management

(POEM), in that year, is in India

► The Explanation defines „POEM‟ to mean as a:

“A place where key management and

commercial decisions that are necessary for

the conduct of the business of an entity as a

whole are, in substance made.”

W.e.f.1 April 2015Upto 31 March 2015

► A company is said to be resident in India in

any previous year, if -

► It is an Indian company, or,

► During that year, the control and

management (C&M) of its affairs is situated

wholly in India

► Shift from the test of ‘whole C&M’ to ‘POEM’ post amendment

► The phrase ‘at any time’ before the words ‘in that year’ proposed in

FB, 2015, deleted at enactment stage


Page 6

Amendment by FA 2015 – Rationale as per EM

► The EM explains the amendment in FY 2015 as:

► Present condition of „whole‟ C&M in India is too strict and practically

inapplicable

► Facilitates creation of shell companies outside India

► POEM is an internationally recognised concept

► POEM is also an accepted concept by OECD for Tie-Breaker Rule (Article

4(3))

► There are well recognised guiding principles for determination of POEM,

although POEM is a fact dependant exercise

► Guidelines to be rolled out for determination of POEM


Page 7

Rationale as per EM - an Example


► ICo intends to invest in the equity shares of a FCo1, a

company based in London

► ICo sets up a company in Singapore (SingCo)

► SingCo invests in FCo1

► SingCo BOD – 4 directors (2 in India and 2 in Singapore)

► Strategic, managerial and commercial decision of SingCo are

in substance taken by ICo in India

► SingCo BMs - 3 BMs held in India and 1 BM in Singapore

► SingCo sold shares of FCo1 to FCo2

► SingCo did not pay any capital gains tax in India on sale of

shares of FCo1FCo1

SingCo

ICoIndia

Singapore

► C&M was required to be situated wholly in India

► SingCo not resident in India as C&M is not wholly in India

► No capital gains tax payable in India

Implications - Pre amendment

► Revised condition requires POEM to be in India

► SingCo might be treated as resident in India as key commercial and strategic decisions (acquisition & further sale), in substance, took place in India

► Capital gains tax liability for SingCo may arise in India if POEM is held to be in India

Implications - Post amendment

WOS

Invest in shares Sale of shares

FCo2

Page 8

Evolution of POEM in India

Resident Test

linked to C&M of

affairs situated

wholly in India

during the year

1922 and 1961 Act DTC 2009

If at any time in a

FY, the C&M of its

affairs is situated

“wholly or partly”

in India

Almost equated

company residency

test with non-

corporate

taxpayer‟s

residency test

under IT Act

2010

Linked Residency

to POEM in India,

at any time

2013

Accepted

recommendations

of the SCF on

change in

definition of

POEM

POEM means

where BOD or

EDs make

decisions or

Where EDs or

officers perform

their functions, in

case BOD

routinely approve

the commercial &

strategic decisions

made by them

Definition of POEM

amended &made

similar to what it is

today as per FA

2015 (except for ‘at

any time in that

year’ in DTC 2013)

Definition largely

aligned with

international

standard & OECD

understanding

Internationally, the concept of

POEM and central C&M are

relevant for determination of

residency of the company


Page 9

Corporate Residency - Significance

► Relevance of residential status

► Scope of income, Rates of tax

► Entitlement to tax treaties

► Filing of return of income and other compliances

► Withholding tax rates/ rules

► Eligibility to certain incentives

► Eligibility to avail FTC (section 91)

► Treatment of a person as a Representative Assessee (RA)

► For various other provisions, it is not Residency which is of relevance – Since these

provisions differentiate companies not on the basis of Residential status but depending

upon whether the company is a domestic company* or a foreign company*

► Rates of tax

► DDT – Section 115O

► Tax on dividend income – Section 115BBD

► Tax on long term capital gains – Section 112(1)(c)

*Refer Annexure 1 for the definitions.


Page 10

Corporate Residency - Different Scenarios and its consequences

Particulars R / NR Taxation

of

Global

Income

Tax Rate DDT

applicable?

Taxability in the

hands of the

shareholder

Domestic

Company

R Yes 30% + SC Yes Exempt (whether R

or NR)

Foreign Company

POEM during the

financial year in

India

R Yes 40% + SC No R – Taxable*

NR – Not taxable**

POEM outside

India

NR No 40% + SC No


*Section 115BBD may apply, to be verified

**Dividend accrues where the company is registered and/ or where the shareholder register is kept

Page 11

Definition of POEM

► A company (inter-alia) can be regarded as a resident in India in any PY, if its POEM is

in India in that PY

► POEM has been defined in the Explanation to section 6(3) as a place where:

► Key management and commercial decisions;

► that are necessary;

► for the conduct of the business;

► of the entity as a whole;

► are, in substance, made

► India‟ is defined under section 2(25A) as : India means:

► “The territory of India as referred to in article 1 of the Constitution, its territorial waters, seabed

and subsoil underlying such waters, continental shelf, exclusive economic zone or any other

maritime zone as referred to in the Territorial Waters, Continental Shelf, Exclusive Economic

Zone and other Maritime Zones Act, 1976 (80 of 1976), and the air space above its territory and

territorial waters”


Page 12

Definition of POEM

► „In that year‟ – Should not mean „at any time during that year‟

► Background/ History/ Budget proposals

► Intent/ Spirit

► POEM for a given year not in multiple countries

► Concept of POEM to be applied for a year (or for a given point of time)?

► Concept under section 6(3) – POEM qua a „year‟


Page 13

Analysing POEM

► Key management and commercial decisions:

► „key‟ means „of central importance‟; strategic: decisions need to be of vital

significance;

► Commercial means „from the point of view of profit; having profit as the primary aim’

► „Management‟ means „the act of managing by direction, regulation, or

administration’

► Requirement of managerial „and‟ commercial is cumulative


Page 14

Analysing POEM - ‘Managerial’ & ‘Commercial’ decisions

Illustrative list – decisions relating to

Appointment / Termination of KMP and their

remuneration

Selection of distributors and its quality

control, marketing and distribution

Reporting structure and key organization /

management policy

Negotiations/execution of contracts

Code of Conduct, Group ethos and Ethics Product Portfolio, methods of manufacture

Global IT systems policy and MIS reporting Expansion and modernisation

M&A and restructuring (including

divestment)

R&D, Brand / patents registration

(licenses), IPR

Common procurement, sourcing for the

group (like raw material), including master

agreements

Fund Raising - Borrowings, Debt Financing,

Capital Sourcing, Right Shares

Capital Expenditure – Funds/ resource

allocation/ utilisation

Pricing of products and services

Operating Expenditure Legal/ Regulatory matters


Page 15

Analysing POEM

► Decisions are necessary for the conduct of the business of the entity as a whole:

► POEM to be tested for overall decisions of the company

► Decision relating to an individual department (Finance, IT, etc.)

► „Majority‟ and not „some‟ / „few‟ key decisions

► are, in substance, made

► Emphasis on decision making and not place of signing/executing documents

► a „de facto‟ and not „de jure‟

► Emphasis is on „reality‟, „actual state of affairs‟ – place where “key management & commercial

decisions are, in substance, made and not simply where the board resides

► „Puppet directors / dummy directors‟ have often been disregarded

► Rubber Stamping

► Extract from SC judgment in the case of Vodafone International Holding BV (345 ITR 1):

“Where the subsidiary’s executive directors’ competences are transferred to other persons/bodies or where the

subsidiary’s executive directors’ decision making has become fully subordinate to the Holding Company with

the consequence that the subsidiary’s executive directors are no more than puppets then the turning point in

respect of the subsidiary’s place of residence comes about.”


Page 16

Analysing POEM

► Indicators for „Substance test‟:

► The agenda debate/ discussion and minutes of BMs

► Composition of Directors

► Powers of the BOD & Source of the Authority/ Power

► Situs and Frequency of BMs, residence of Board members

► Collateral evidences (i.e. social website profiles – LinkedIn, visiting card of

employees, inquiries by other regulatory bodies, E-mail exchange between KMPs)

► Place of BMs

► Physical presence, Virtual presence (over Telecon/ VC)

► MCA Circular on CA1956: Situs of video meetings is where Chairman is seated

► MCA Circular on CA2013: The place of BM is deemed to be at the place of the

meeting which is set forth in the notice issued to convene the meeting

► Corporate Law of overseas jurisdiction, constitution/ M&A/ Bye laws of the

company

► Circular Resolutions


Page 17

Analysing POEM - C&M vs. POEM

C&M POEM

Place where directors exercise their powers and

authority (English cases of De Beers, Untelrab,

etc)

Who governs the commercial adventure;

Who decides the terms on which adventure

should be carried on;

Who can be said to be in command of the

decision making power.

Deals with place of making key decisions as a

whole, which are normally made by BOD

Making of key managerial and commercial

decisions may be equated to „exercise of power

& authority‟

Actual control of decision of BOD In substance, actual conduct of personnel

Effective management and control (para 23 of

OECD commentary)

Focus on in substance management and control

Central C&M means highest level of control of

the business

Thrust on „key managerial and commercial

decisions‟ and not on operations

Act of interference and acts of control beyond

normal parental control (Unit Cons, UK Court)

POEM also focuses on „key managerial

decisions‟ & intended to target companies set up

outside India, but managed and control from

India


Page 18

Analysing POEM - Indian Precedents on C&M

► Relevant extract from Kanga & Palkhiwala, (Tenth Edition, Page 319)

"As a rule, the direction, management and control, "the head and seat and directing power" of

a company's affairs is situated at the place where the directors meetings are held and

consequently a company would be resident in this country if the meetings of directors who

manage and control the business are held here.”

► C&M understood by Indian judiciary as „place of overall policy or top decision making is

done‟ (Refer Annexure 2 for various case laws)

► Key principles emanating from case laws on C&M

► Place where „mind and management‟ of the company is situated

► Place where de facto control and power is actually exercised in the course of conduct and

management of affairs of the company

► Place where real business is carried out

Established principles for determination of C&M should be useful in

understanding principles for determination of POEM


Page 19

POEM - Model Commentaries

► Article 4(3) under OECD / UN MC lays down POEM as Tie-breaker test

► OECD definition adopted by India – OECD Model Commentary states that

► all relevant facts and circumstances must be examined to determine the POEM

► an entity may have more than one place of management, but it can have only one POEM at

any one time

► POEM determination - UN MC guidelines:

► Place where a company is actually managed and controlled (on a permanent basis)

► Place where the decision-making at the highest level on important policies essential for the

management of the company takes place

► Place that plays a leading part in the management of a company from an economic and

functional point of view

► Place where the most important accounting books are kept

Protocol in DTAA between India – Belarus Protocol in relation to POEM is similar

to UN Model


Refer Annexure 3 for different variants of Tie-Breaker Rule in DTAAs

Page 20

POEM - Model Commentaries

► OECD advises CAs to take into account the following for tie-break:

► The place where the actions to be taken by the entity as a whole are determined

► Place where majority of the board of directors or equivalent body usually meet

► Location of and functions performed at head-quarters of the entity

► The place where the CEO and other KMPs usually carry on their activities

► Corporate Books are located

► Which country's laws govern the legal status of the person

► Whether determining POEM in one contracting state would lead to improper use

of benefits under DTAA


Factors have persuasive value in evaluating POEM in given facts

Page 21

BEPS Action Plan 6 – Prevent Treaty Abuse

► OECD released final Report on BEPS Action Plan on 5 October 2015

► The report on BEPS Action Plan 6 identifies treaty abuse (in particular treaty shopping)

as one of the most important sources of BEPS concerns

► In view of tax avoidance cases, dual residency to be resolved on case-by-case basis

by the CAs (Proposed revised para 23)

► The Report proposes to replace Article 4(3) of OECD MC (POEM) by “Competent

Authority Rule” & relevant paragraphs 21 to 24.1 of the OCED Commentary

► Proposed Article 4(3) - CAs will consider POEM, place of incorporation & any other

relevant factor for determining residency

► No relief or exemptions under the Convention (except specifically agreed by the CAs),

in absence of determination of residency by the CAs (Proposed revised para 24.4)

► The Report also provides for “POEM” Rule as an alternative, but however, prefers

“Competent Authority Rule” over “POEM” Rule

► It is concluded in the Report that the “Competent Authority Rule” is a better solution to

the issue of dual residence of entities other than individuals


Page 22

Case Held

Hoge Raad der

Netherlanden

(Netherlands SC)

► The term „effective management‟ is related to taking core decisions, directing,

and taking initiatives, rather than carrying out, or preparing or determining,

policy, or determining the company‟s activities

► As daily management seems in opposition to key management, it is unlikely

that it could ever make up part of any core decisions.

Case 2C-

1086/2012, 2C-

1087/2012

(Switzerland SC)

► POEM must be distinguished from both top-level management activities and

purely administrative activities

► POEM defined as the economic and effective centre of a company.

► The decisive factor is the management of daily business activities within the

company's purpose

Yanko Weis

Holdings Ltd v.

Holon Income Tax

Assessor (Israel

District Court)

► POEM should be determined on the basis of a factual assessment of where the

decisions as to the company's business policies, strategy and daily decisions

were taken

► Place where the management decisions were actually taken instead of

execution the same

POEM – International judicial precedents


Refer Annexure 4 for details of POEM/ C&M concept in the domestic law of certain countries

Page 23

POEM vs. POM

POEM POM

► A place where the decision making at the highest level for he entity as a whole

► POEM is related to decision making of the overall management & business matters of a company

► Refers to the key strategic, commercial and managerial decisions making at the highest level of the hierarchy

► The emphasis is on a place where the effective management resides

► POEM leads to residency resolution and resident based taxation

► POEM would always be a POM

► An enterprise can have only one POEM

► POM is a place where strategic, management and crucial decision making process takes place

► An enterprise can have more than one POM

► A place from which a business is merely supervised could qualify as a POM

► POM is where significant (and not overall) business decisions are made & implemented

► Represents involvement of executive level management which reports to the BOD

► POM PE is relevant one for the entity which is the treaty resident of the other jurisdiction

► POM may not necessarily be a POEM


► POEM used as a „Tie-Breaker Rule‟ - Article 4(3)

► POM - Article 5(2)(a)

Page 24

Evaluation of POEM – Practical Insights


Page 25


► BOD

► Qualification, Experience, Domicile, composition, independence, etc.

► Powers of BOD as per Charter documents/ Corporate Law

► Travel records such as itinerary, travel logs, work visa, etc., of visit to India & performance of any decision

making function or conclude contracts/ execute documents while in India

► KMPs

► Different Levels and functions

► Delegation of Authority matrix

► BMs

► Number of meetings

► Circulation of agenda and agenda notes

► Meetings through VC/ Physical chaired

► Chairman

► Minutes

► Activities of past period (say last 2 years) and future expected activities

► Identify key transactions/ functions/ activities

► Identify the key decisions along with the decision making process


Page 26


► Parental control

► Transactions between parent and overseas subsidiaries – whether at ALP

► Any data or information shared with the parent beyond the right as a shareholder

► Whether binding instructions by the parent

► Level of interference/ control as regards decisions revolving around employees of the overseas

subsidiaries

► Relevant resolutions passed by the parent to consider and note overseas subsidiaries

information (e.g., under SEBI guidelines/ listing agreement);

► Residency of the Company Secretary (an employee or third party service provider)

► Place where corporate records, including title documents etc are being maintained

► Adequacy of documentations, maintained from a secretarial perspective to further evidence

decision making process


Page 27

OS2

Case Study

Facts:

► ICo is a business consulting company

► ICo has two overseas subsidiaries viz OS1 & OS2, engaged into selling &

marketing activities on P-to-P basis

► ICo outsources work to OS1 & OS2

► OS1 & OS2 have valid TRCs

► All BMs of OS1 & OS2 are held outside India

► ICo employees on board of OS1 & OS2, attended BMs through VC

► ICo personnel are authorized to sign contracts or operate bank accounts of OS1 &

OS2

► All legal notices of OS1 & OS2 are sent to ICo address in India

► OS1 has

► 5 BOD out of which 2 are of ICo & 3 are of OS1 jurisdiction with business experience

► MD who sits outside India and reports to BOD

► its own office place and 20 employees

► OS2 has

► 3 BOD out of which 1 is of ICo, 1belongs to legal & 1 belongs to finance and Accounts sector

► No MD, No WHD & No SE

► No office space and 5 employees

Issue: Whether OS1 & OS2 can be said to have a POEM in India?

ICo

India

Outside

India


OS1

Page 28

Case Study

► Important points to be considered:

► BMs

► Competency of BOD

► Presence of KMP

► Robust documentation for key decision making

► Parental control

► Conclusion?


Page 29

Key takeaways


Page 30

POEM – not in India (favourable indicators)


Commercial substance

in subsidiaries

Competent BoD

based outside India

Control and

management at

overseas subsidiary’s

Board level

Board meetings

conducted outside

India

Strong

factors to

demonstrate

POEM not in

India

Page 31

General discipline and approach to litigation

► Obtain TRC from the jurisdiction of residency

► Guidelines for POEM determination may be adhered to strictly

► Formulated procedures should be followed in spirit without compromise

► Likely subjective assessment of uncertain factors, better to avoid

technicalities

► Law would be interpreted based on de facto, actual conduct and on

„substance‟


Page 32

Illustrative list of key decisions to be considered/ noted in the BMs

► Quarterly accounts review and evaluation of financial performance

► Critical/ unique contracts or contracts of high value and renewal of key contracts

► Pricing policy of various services and specific approval in case of deviation

► Setting up of branches/ subsidiaries of the company

► Significant new ventures, partnerships, alliances or capital expansions

► Appointment/ replacement/ elevation of BoDs/ KMPs/ SMPs

► Liquidation of the subsidiary/ closure of the branch

► Approval of key corporate policies, if any

► Resolution of high level disputes

► Reviewing key legal aspects of critical contract


Decisions at BMs as per local laws to continue

Page 33

Abbreviation Particulars Abbreviation Particulars

AAR Authority for Advance Rulings HMRC Her Majesty‟s Revenue & Customs

Act Income-tax Act, 1961 IT Information Technology

AGM Annual General Meeting KMP Key Managerial Personnel

ALP Arm‟s Length Price M & A Mergers & Acquisitions

AOA Articles of Association MAP Mutual Agreement Procedure

APAC Asia Pacific MIS Management Information System

BEPS Base Erosion and Profit Sharing NR Non - Resident

BM Board Meeting OECD MC Organisation for Economic Co-operation & Development Model Convention

BoD Board of Directors POM Place of Management

BPO Business Process Outsourcing R Resident

CA Companies Act R & D Research & Development

CAs Competent Authorities SC Surcharge

C & M Control & Management SC Supreme Court

CEO Chief Executive Officer SCF Standing Committee on Finance

DRP Dispute Resolution Panel SEBI Securities and Exchange Board of India

DDT Dividend Distribution Tax SMP Senior Managerial Personnel

DTAA Double Taxation Avoidance Agreement SPV Special Purpose Vehicle

ED Executive Director UK United Kingdom

EM Explanatory Memorandum UN MC United Nations Model Convention

FA Finance Act US United States of America

FB Finance Bill UTC Underlying Tax Credit

FTC Foreign Tax Credit

Glossary


Page 34

Annexures


Page 35

Annexure 1 - Concept - ‘Domestic’ and ‘foreign’ company

► Domestic company (Section 2(22A)):

► A company incorporated in India : an Indian company

► A company incorporated outside India which has made arrangements for

declaration and payment of dividend in India out of its profits chargeable to tax in

India (Rule 27)

► Foreign company (Section 2(29A)):

► A company which is not a domestic company

► Thus, a corporate entity shall be:

► Domestic company R in India

► Domestic company NR in India

► Foreign company R (due to POEM in India)

► Foreign company NR in India

A company incorporated outside India remains a foreign company even if it is

treated as resident in India (due to POEM being in India)


Page 36

Annexure 2 – Judgements on C&M

C&M understood by Indian judiciary as ‘place of overall policy or top decision making is done’

► Subbayya Chettiar v CIT (19 ITR 168) (SC)

► Narottam & Pereira Ltd. v. CIT (1953) (23 ITR 454) (Bom HC)

► Saraswati Holding v. DDIT (2007)(111 TTJ 334) (Del HC)

► Sri Raja K V (18 ITR 181) (Mad HC)

► AAR Ruling in P. No. 10 of 1996 (224 ITR 473)


Page 37

Annexure 3 - Tie-Breaker Rule – Different Variations

Types of tie-breaker rule Resolution

basis, if any

DTAA

A company shall be considered to be outside

the scope of the Convention except for

certain specified clauses in Article 4(3)

No treaty benefits

except for specified

clauses

USA

Residency tie breaker shall be settled by the

CAs of both the countries

MAP settlement Canada, Japan, Thailand

Residence tie breaker is resolved on the

basis of determination of POEM. If POEM

cannot be determined, the CAs shall settle

the tie-break issue by mutual agreement

1. POEM

2. MAP settlement

Austria, Philippines, Malaysia,

Norway, Sweden, South Africa,

Romania, Hungary, Portugal,

Luxembourg

The CAs of both countries through mutual

agreement shall determine the residency

based on place of incorporation, POEM and

any other relevant factors

MAP settlement Finland

A company is deemed to be a resident of the

country in which its POEM is situated

POEM Singapore, Spain, Netherlands,

Mauritius, Switzerland, Italy,

France, Poland, Germany

A company is deemed to be a resident of the

country in which its head office is situated

Head office China


Page 38

Annexure 4 - International Scenario: Concept of POEM/ C&M in the domestic law

Country Residency Test applied where POEM/ C&M or similar concept is recognised

Russia POEM is governed by specific rules set in Russian domestic law rather than

international practice and principles.

The effective management and control is established by a combination of various

criteria, with much weight given to record-keeping and record management in

determining the place of residence

China POEM is an establishment that exercises, in substance, overall management and

control over the production and business, personnel, accounting, properties, etc. of an

enterprise

South Africa POEM is not defined.

Based on the administrative Guidance and judicial precedent, it is the place where „real‟

BOD of directors actually make decisions on important business affairs of the company

UK The judicial precedent as also the views of UK HMRC emphasis on de facto central

management and control

Austria POEM - Centre from which the activities of the company are effectively directed

Place of management - office of the principal officers / the managers of the company

Place of management is equal to the place of effective management

Singapore Relevant factors such as the provisions in the AOA of the Company, place where

decisions relevant to management and control are taken by the BOD, place where BOD

meetings are held, place where AGMs are held and the agenda matter at AGM.


Page 39

Annexure 4 - International Scenario: Concept of POEM/ C&M

Country Residency Test applied where POEM/ C&M or similar concept is recognised

Malaysia Resident if at any time during the basis year the management and control of its

business or of any one of its businesses are exercised in Malaysia.

Italy Resident companies are those that, for the greater part of the tax year, have had their

legal headquarters, place of effective management or main business purpose in Italy.

The place of incorporation is not relevant.

Germany The term “place of management” is normally defined as the place where the persons

who have final authority make their decisions concerning the management of the

business.

France POEM is the place where the meetings of the BOD and shareholders are held and the

place where the people involved in the decision making are located.

Canada A non-Canadian company which is centrally controlled and managed in Canada is

regarded as resident of Canada.

Central C&M is determined having regard to the place where independent directors

make their decisions.

Switzerland Place where important decisions are taken is regarded as POEM and the POEM is

determined based on circumstantial evidences.


Thank You


Documents

Tax Residency under POEM - fitindia.org › downloads › Tax_Residency_under... · Pranav Sayta Tax Residency under POEM 16 October 2015. Page 2 2 Evaluation of POEM –Practical