SKP Tax Alert
POEM - CBDT releases draft rules for computation of total income, treatment of unabsorbed losses, set off or carry forward of losses, etc.

Place of Effective Management (POEM) based residency has been made applicable from the Financial Year (FY) 2016-17 by the Finance Act, 2016. The concept of POEM provides that a foreign company shall be treated as a resident in India 
if, during the year under consideration, its place of effective management is in India. POEM has been defined to mean a place where the key management and commercial decisions that are necessary for the conduct of the business of an entity as a whole are made.  

Furthermore, the Central Board of Direct Taxes (CBDT) has also issued guiding principles for determination of POEM[1] on 24 January 2017.

The Finance Act, 2016 inserted Section 115JH which provided that the Central government may notify rules for computation of total income, treatment of unabsorbed losses, set off or carry forward of losses, etc. in respect of foreign companies treated as a resident of India by virtue of having POEM in India. These rules would apply notwithstanding any other provisions of the Indian Income Tax Act.

In light of the above, the CBDT has issued a draft notification dated 15 June 2017 providing for exceptions, modifications and adaptation in respect of foreign companies treated as resident in India by virtue of having its POEM in India.

The key takeaways from the said notification are as follows:
  • Rules prescribed for computation of Written Down Value (WDV) of a depreciable asset, determination of Brought Forward (B/F) losses and Unabsorbed Depreciation (UAD) in respect of foreign companies treated as resident in India by virtue of having its POEM in India have been summarised below:
    Particulars Computation method
    Foreign company assessed to tax in foreign jurisdiction
    • WDV as per tax records of foreign jurisdiction
    • B/F losses and UAD as per tax records of foreign jurisdiction
    Foreign company not assessed to tax in foreign jurisdiction
    • WDV as per accounting records of foreign jurisdiction
    • B/F losses and UAD as per accounting records of foreign jurisdiction
     
  • In the case where the financial year followed in a foreign jurisdiction is different, the foreign company would be required to prepare the Financial Statements[2] according to Indian financial year. 
  • In the case of applicability of more than one provision in respect of withholding taxes, it is clarified that provisions as applicable to a foreign company shall only apply.
  • The provisions in respect of making an application to the Tax Authorities for a nil/lower withholding tax order shall apply even to a foreign resident company.
  • Once the foreign company is treated as a resident in India by virtue of having its POEM in India, the foreign company would be eligible to claim a credit of taxes paid outside India as per the provisions of the Indian Income Tax Act.
  • Indian Income Tax Rules would apply in respect of rate of exchange for conversion into rupees of value expressed in foreign currency, wherever applicable.
  • The tax rate applicable to the companies having POEM in India would be the same as applicable to a foreign company even though they are considered as a resident foreign company.
  • These exceptions, modifications and adaptations would not apply to a foreign company if the said foreign company is treated as a resident due to reasons other than POEM in earlier years. Also, these exceptions, modifications and adaptations would apply for the computation of income of a foreign company having its POEM in India and it would not alter any other transaction of this foreign company with other entity or person.
 
SKP's Comments
This is a draft notification that has been issued by the CBDT and comments are invited from the industry and stakeholders by 23 June 2017. There is no explicit mention on the applicability of maintenance of books of accounts, the applicability of transfer pricing provisions, etc. However, it appears that the same would apply to the foreign company having its POEM in India.
SKP
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