Draft POEM Guidelines - Will it soothe the frayed nerves of MNCs/India Inc?

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The eagerly awaited guidelines for determining place of effective management (POEM) have been released by CBDT for public consultation. The final rules would form the basis for determining residence of companies (other than Indian companies), with effect from April 1, 2015 ! The draft-guidelines prescribe a quantitative and objective initial threshold of 'active business outside India', followed by the test of a majority of the Board meetings. The draft-guidelines thereafter provide several criteria (to be evaluated based on specific facts) for identifying persons who actually make key management and commercial decisions and then determining the place where these decisions are actually made.  The draft-guidelines re-iterate "substance over form" approach at multiple places and reject the adoption of a 'snap-shot' approach.

 

Will the POEM guidelines achieve the desired objective of effectively plugging tax avoidance through artificial escaping of Indian residence? Do these draft rules alleviate some the boardroom concerns vis-a-vis POEM implementation or will it necessitate more careful tax planning?  Do these guidelines effective address challenges arising due to modern day technologies and communication channels and dynamic business circumstances? And finally, will the AO having to run his POEM orders past the Principal Commissioner, prove to be a sufficient deterrent?

Mukesh Butani
Managing Partner, BMR Legal

POEM - a misdirected tax missile ! Palkhivala described Churchill's art of persuasion ' For something to be convincing, it must in the first place be simple'. That's how one can philosophically sum up the draft POEM guidance. The draft guidance issued for public comments is in pursuance to what the law makers describe as an 'anti avoidance' measure passed in the budget of 2015 to bring to tax (a portion) of passive income of foreign subsidiaries of Indian companies and Indian subsidiaries of foreign companies using Place of effective management (POEM) test. It reinforces strictest form of source based rules and is often used by tax regimes of sophisticated jurisdictions to curb the practice of shifting profits. In the context of India, it shall over ride extant regulation on taxability of income based on residency principles. Under the present law, Foreign companies (whether subsidiaries of Indian companies or holding companies of Indian subsidiaries) are not taxable unless the entire management of that foreign company is situated in India. To bring to tax such income, definition as to what constitutes place of effective management (POEM) assumes significance. A case in point is the first principle...

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