Place of Effective Management (PoEM) ,PATENT BOX REGIME

 

Taxation of MNC's is very contentious issue . Residential status of a company is crucial in deciding of tax rates. Place of Effective Management (PoEM) is one such arrangement which defines the residential status of a company and thus taxability of a company .

Place of Effective Management (PoEM) : 

• Place of Effective Management (PoEM) is an internationally recognized test for determining the residential status of a company incorporated in foreign jurisdiction. 
• This concept is crucial for all the tax treaties entered into by India as it helps to implication of taxes on companies.

INDIA AND Place of Effective Management (PoEM):  

• Under Income Tax Act, 1961, it is very important to determine the residential status of any person as it helps in determining the scope of taxable income in India.
•  Until 2015, the concept of determination of residential status of foreign companies was very simplified and a company was considered as Indian resident if:

• It is incorporated in India; or 
• Its control and management is situated wholly in India. 
• Therefore, most of the companies used these simplified provisions as a loophole to prevent residential status in India by shifting insignificant or isolated events related to control and management outside India in tax havens.
• The objective of shifting residential status to outside India is merely to reduce tax liablity as Corporate tax in India is one of the highest rates in comparison to Tax havens.

NEED OF REVISITING THE DEFINITION OF Place of Effective Management (PoEM) : 

• The existing definition of Place of Effective Management (PoEM) was manipulated by companies.
• Companies having shell companies in tax havens have structured their operations in such a manner that  companies were present or active in a country without paying applicable taxes. 
• Company were having key managerial people stationed in India with substantial asset base and operations  in India but selling goods through a subsidiary in Tax haven.
• As per the definition of Place of Effective Management (PoEM) , companies claimed that it has no effective management in India and hence, it could end up paying very little tax.

REVISED DEFINITION OF Place of Effective Management (PoEM) :

The Finance Act, 2015 introduced the concept of Place of Effective Management (POEM) while determining residential status of companies in India and as per amended provisions, a company is considered as resident if:

• It is an Indian Company; or 
• Its place of effective Management in that year is in India

• So at present, if any company is having management and operations in India, along with shell company outside India (just to evade taxes), then as per Place of Effective Management (PoEM), company will be treated as resident of India and hence will be taxed as per tax laws of India.
• It will not be in a position of taking the tax benefits merely by having shell company in tax haven.

 

PATENT BOX REGIME:

• Patent Box regime was introduced in India by Finance Act, 2016 by enacting new Section 115BBF. 
• This box is applicable for all patents registered after April 1, 2016. 
• Under Patent Box regime, any company has to pay 10% tax on total income earned by the   commercialization of patents which are developed and registered in India. 
• The condition is that such patent must have been developed and registered in India under Patents Act, 1970.

NEED OF PATENT BOX REGIME:

• This is a concessional tax regime because otherwise, the 30% Income tax was applicable to income from patents/ royalty / intellectual property in the country. 
• In view of the high tax rates, companies register patent in tax havens.
• Thus the countries where these patents were developed were not benefitted by the patent development, even if the patent were developed in their country.
• Thus, with a view to retain the intellectual property in the country where it was developed and to promote innovation and research, many countries started to introduce beneficial taxation regime for income generated from such Intellectual Property.