The Central Board of Direct Taxes (CBDT) on Tuesday issued the much-awaited “guiding principles” for determination of a Place of Effective Management (PoEM) of a company, scotching speculation that the Budget may see its removal from the statute book.
Put simply, 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.
The CBDT guidelines come barely two months before the end of fiscal year 2016-17, in which PoEM had become legislatively effective, giving little time for Indian multinationals to prepare for the new regime.
The main objective of introducing PoEM was to ensure that companies incorporated outside India but controlled from India do not escape taxation here. It also brings in the concept of residency of corporates with internationally accepted principles, say tax experts.
Girish Vanvari, National Head of Tax, KPMG in India, said that the guidelines stress on substance over form. “They attempt to differentiate between shareholder control, management control and routine decisions. Whilst the guidelines are comprehensive, they are subjective on substance and can be challenged for interpretation in many places,” he said.
Narrower application Rohinton Sidhwa, Partner, Deloitte, Haskins & Sells LLP, said that what has been released has a narrower application than what was originally proposed. They are also supplemented with examples on isolated facts that will not lead to a PoEM as also illustrative interpretations. The legislative amendment was effective from April 1, 2016, whereas the guidelines are being released only today, Sidhwa pointed out.
Hitesh Sawhney, Partner — Direct Tax, PwC, said thatCBDT has clarified that the intent of PoEM provisions is to target shell companies/companies that are created to retain income outside India and not Indian MNCs engaged in business overseas.
Stress on substance Aseem Chawla, Managing Partner, ASC Legal, a law firm, said that the finalised guidance relies on substance over form and that routine operational decisions shall not be relevant for PoEM determination.
“Also a panel of three commissioners is to affirm the proposed decision of the assessing officer on the PoEM of a foreign company. Hopefully, this will not impinge upon the right to appeal by the foreign company before a judicial forum,” he added.
Now that the final guidelines are out, will the government go ahead with a Controlled Finance Corporation (CFC) structure or not? Says Daksha Baxi, Executive Director, Khaitan & Co: “My personal view is that CFC is a better anti-avoidance provision, less prone to subjectivity and therefore less litigative.” It seems that at least for the current year, where PoEM is applicable, the government wants to ensure that the provision can be properly implemented, she said.
Rahul K Mitra, Head of Transfer Pricing & BEPS, KPMG in India, said: “With guidelines for PoEM out, it looks like they may not be introducing CFC.”
Jiger Saiya, Partner – Direct Tax, BDO India, echoed his thoughts, saying the “government seems inclined towards implementing the PoEM framework rather than introducing an alternative measure.”