Implementation of POEM rules may hit investments
The implementation of place of effective management (POEM) rules in the current scenario in India could not only hurt the nation’s outbound investments, but also discourage overseas multinational companies from setting up their regional hubs here, feel industry watchers.
The draft guidelines for implementing POEM, which was released on December 23 and aimed at bringing clarity on residency status of firms for the purpose of taxation, need to offer more clarity, they say. The companies would also require six to nine months to make back-end changes to implement the new norms, they feel.
India has been a net capital-importer. Provisions such as POEM and Controlled foreign corporation (CFC) rules are enacted as anti-avoidance measures in countries, which are capital exporting and the governments are concerned about non-taxation of overseas profits. “While we have seen a lot of outbound activity over the last decade, most acquisitions by Indian MNCs are still not in the green. Having said that, the concerns which the Indian government has can be addressed by alternative provisions like CFC which are more objective, certain and less cumbersome to the tax payers in terms of compliances. Introduction of PoEM provisions at this stage may affect the competitiveness of Indian MNCs in the overseas market,” said Parikshit Datta, senior director, Deloitte in India.
The Finance Act 2015 has proposed to amend the test of residence for foreign companies to provide that a company would be treated as resident in India if its place of effective management in the previous year is in India. POEM has been defined to mean 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.
Tax residency is an important global concept to determine the taxation of any entity in India. The draft guidelines issued by the finance ministry has few similarities to one in place in South Africa. “Given that the draft guidelines have been announced in December 2015, which is nine months from the start of the financial year, and that the final guidelines may still take more time. It is imperative that POEM be deferred by at least one year. This would provide time to tax payers and tax administration to understand and evaluate the implications arising from POEM,” said Vikas Vasal, partner (tax) at KPMG in India.
There are many aspects in the POEM draft guidelines that require more clarity, said several firms spoken to by FE. For instance, firms are not clear whether while computing 50% of the total assets situated in India, whether book value or tax written down value or market value of assets is to be considered. Similarly, clarity is required as to which all expenses would fall within the purview of payroll expenses.
Income from transactions involving purchase and sale of goods from and to associated enterprises should not be considered as passive income, as this income arises from active business operations, said Vasal adding that provisions relating to passive income in respect of royalty income arising from licensing of IPR, among others need to be re-considered.
“We would like to see more certainty in the POEM guidelines. It would be good if some kind of safe harbor provisions are prescribed. For instance, application of PoEM provisions may be restricted to companies in low tax jurisdictions subject to evaluation of other factors. Also, given that the draft PoEM guidelines are recently issued and may take some time before being finalised, it would be good if the implementation is deferred to next year so that companies can evaluate the impact of the final guidelines on its business,” explained Datta.
