GAAR & POEM- Combating Tax Avoidance
The Central Board of Direct Taxes (CBDT) has on 24th January 2017 issued final guidelines for determination of “Place of effective management”(POEM). On 27th of January, again CBDT released clarifications on “General Anti Avoidance Regulations” (GAAR).
POEM is effective April 01,2016 whereas GAAR is effective from April 01,2017.POEM can be said to be Anti Tax Evasion regulation as it will impact shell companies carrying artificial transactions blatantly and parking of funds in Tax free Jurisdictions whereas GAAR is an anti-tax avoidance mechanism that will challenge Tax free transactions very effectively.
Place of effective management
“Place of effective management” is a place where key management and commercial decisions are made. All Indian companies having subsidiaries abroad and foreign companies having offices in India, should carefully consider the impact and determine impact of guidelines issued for POEM. Further, most of the tax treaties entered into by India recognises the concept of POEM for determination of residence of a company as a tie-breaker rule for avoidance of double taxation.
CBDT wef 24th January 2017 provided primary and supportive test for deciding POEM:
Primary test is to decide “Active Business Outside India” (ABOI), then supporting Tests to decide:
- Head Office Situation
- Passive Income
- Senior Management
All the above have been explained in detail in the revised guidelines though it has also been clarified that the concept of POEM is one of substance over form. It has also been clarified that an entity may have more than one place of management, but it can have only one place of effective management at any point of time.
Since status of the “residence” is to be determined for each year, POEM will also be required to be determined on year-to-year basis. The process of determination of POEM would be primarily based on the fact as to whether or not the company is satisfying ABOI test supported by all supported tests explained above.
This could prove to be a complex issue as Assessing officer could question the status every year as any determination of the POEM will depend upon the facts and circumstances every year.
It needs to be emphasized that the determination of POEM is to be based on all relevant facts related to the management and control of the company, and is not to be determined on the basis of isolated facts that by itself do not establish effective management.
General Anti Avoidance Regulations
These are rules to curtail tax avoidance in general. GAAR will empower tax authorities to check unacceptable tax avoidance transactions or arrangements, which do not have any commercial substance or consideration other than achieving the tax avoidance. Countries such as UK, France, Singapore, China, Germany etc. all have implemented GAAR and India is introducing only now.
For Foreign Investors, GAAR would be applicable where benefit of Double Taxation Avoidance Agreements (DTAA) has not been considered. The treaty provisions will override GAAR except when there is Impermissible Avoidance Arrangements (IAAs). These provisions empower tax authorities to declare any transaction as IAA and determine the tax thereon, provided transaction lacks commercial substance and have been done to avoid taxes.
Foreign Investor are considering their structures in light of the new anti tax measures announced by Government to protect it’s revenue.
While all anti Tax measures should be welcomed, however, their implementation should not impede ordinary business transactions. A more predictable and measured way to implement new regulations should be key for successful implementation of Anti Tax Measures and to avoid casualty of good business.