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?

Subhankar Sinha
Senior Vice President, Head of Tax South Asia & Middle East, Siemens Ltd.

"The CBDT has certainly made a good beginning in laying down the guiding principles for the determination of “Place of Effective Management” (POEM). This will provide the much needed clarity not only to the taxpayers but also to the tax administration.

The draft guideline is quite categorical in stating that one should not jump to a conclusion by looking at the facts in isolation … rather one should look at all the relevant facts on a holistic basis.

Example (iv) in Paragraph 9 of the draft guideline mentions that the existence of preparatory and auxiliary support functions in India will not be considered as a conclusive evidence for establishing POEM in India. The same principle should also be extended when governance functions of a foreign company are carried out from India.

Based on the inputs received from the stakeholders, the CBDT may give more detailed examples or case studies to provide further guidance on the subject.

It needs to be noted that for a section of the industry, the proposed approach to determine POEM will have significant ramifications. In order to make their life a little easier, the Board may consider deferring its implementation...

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Rishabh Sawansukha
Vice President - Taxation, Snapdeal

"Amendment in Section 6(3) of Income Tax Act, 1961 in Finance Act 2015 was carried out to spring clean disputes over the tax residency status of foreign companies wherein earlier definition on residency under Indian Income tax law was not aligned with OECD and various Tax Treaties signed by India. Focus has been shifted to Place of Effective Management (POEM) of company at any time in previous year from control and management of its affairs situated wholly in India.  POEM means 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.

Every amendment in law conveys an intent of policy makers working for the betterment of Nation but certainly demands effective & clear communication of the same to its two critical stakeholders i.e. Tax Collectors and Tax Payers so that friction is minimal.

In view of this, Government has put out guiding principles on 23rd December 2015, for the law going to be effective from 1st April 2016. It is indeed a welcome step and will discourage structuring driven purely from tax perspective and not by business needs. However...

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Sanjay Sanghavi
Partner, Khaitan & Co

“I think these Guidelines are quite ‘comprehensive’ and ‘balanced’ with a bent of practicality.  As was expected, the focus of the Draft Guidelines is largely on ‘substance’ rather than on ‘form’.  These are meant for the benefit of taxpayers as well as the tax administration so that any ingenious attempt to evade or defer the tax liability in India while controlling a foreign company from India can be addressed. At the same time, the intention of the Draft Guidelines also seems to ensure that there is no harassment of the taxpayers in genuine cases. From this perspective, the Draft Guidelines provide that before an Assessing Officer holds a foreign Company to have a POEM in India, he will need to take prior permission from the Principal Commissioner or Commissioner and an opportunity of hearing will be given to the concerned company before deciding the matter.

Another good feature of the Draft Guidelines is that, no single criteria will be determinative and an ‘overall view’ of the matter having regard to the material facts and circumstances, will be the crucial factor. The guidelines seek to provide a comprehensive framework for proper understanding and administration of POEM provisions.  One...

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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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Gautam Doshi
Group MD, Reliance Anil Dhirubhai Ambani Group

“Place of Effective Management (POEM) is a tie breaker test - a test difficult to apply to which reference is made only in difficult circumstances - when all normal tests fail to identify the country of Residence. Amended Section 6(3) seeks to make far more extensive use of this test as the default test and not as a test of the last resort and therein lies the rub. It is a concept which can be understood and felt but, a concept which is not amenable to an objective description. Given this impediment CBDT have done a commendable effort at trying to specify criteria which Assessing Officers and assessees can use. But, at the end it would appear that one is not wiser - there is no magic wand which can be used to apply the test.

The draft guidelines also do not address the issue of determining POEM for companies which do not need and are not actively managed. If in such cases the default of the location of the activities of the company  - investments held outside India or trade carried on outside India - or the location of accounting records is, as is suggested, adopted...

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