1. Experts welcome POEM rules but advise caution on implementation, delay in clarity

Experts welcome POEM rules but advise caution on implementation, delay in clarity

While tax experts welcomed the guiding principles on “place of effective management (POEM)” rules, some advised caution on actual implementation and some expressed disappointment over delayed announcement

By: | Updated: January 24, 2017 7:11 PM
CBDT’s long-awaited guiding principles to determine place of effective management of a company clarify the rules which have been in effect from this financial year beginning April 1, 2016. (Image: Reuters) CBDT’s long-awaited guiding principles to determine place of effective management of a company clarify the rules which have been in effect for this financial year beginning April 1, 2016. (Image: Reuters)

While tax experts welcomed the guiding principles on “place of effective management (POEM)” rules, some advised caution on actual implementation and some expressed disappointment over delayed announcement.

Earlier Tuesday, the government issued clarifying rules on determining the companies’ place of effective management (POEM), in order to target the shell companies that are created to evade taxes through establishing overseas subsidiaries.

However, it excluded from its purview firms with an annual turnover of less than Rs 50 crore and all the businesses with active business operations overseas.

Want to know more about it, check this out:
CBDT rules on companies’ effective residence: How to read this POEM?

The CBDT’s (Central Board of Direct Taxes) long-awaited “guiding principles” to determine the place of effective management of a company clarify the rules which have been in effect from this financial year beginning April 1, 2016.

Here’s what the experts are saying:

  • Delayed Announcement
    “While the PoEM guidance notification today is welcome, given that it has come ten months into the current FY, the government could have considered deferring its effectiveness by a year to 1 April 2017. Moreover, the notification lacks guidance on consequences of a foreign company coming into the PoEM net such as whether it would need to comply with all compliances (e.g. withholding tax and TP) as required under Indian domestic tax law.”
    – Radhika Jain, Director, Grant Thornton Advisory

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  • Implementation concerns
    “Given that POEM is one of substance over form, in theory, it should always produce results, which reflect the true policy intention. In the modern environment, however, the application of the traditional POEM factors may not result in a clear determination of POEM, or may result in an outcome, which does not appear to accord with the policy intentions. The guiding principles issued by the CBDT seeks to address some of the practical issues which could arise in application of the POEM test. The guideline strikes the right balance between providing certainty to taxpayers as well as ensuring that offshore companies with no substance or activities, which are controlled from India, are subject to Indian tax jurisdiction.”
    – Rajendra Nayak, Tax Partner, EY India
  • Safeguards against harassment
    “In the final guidelines the CBDT has provided adequate safeguards to ensure that POEM guidelines does not become an oppressive tool in the hands of revenue to harass genuine assessees. Now Assessing Officer can ascertain the residential status of foreign company on basis of POEM guidelines only after taking two-stage approval. First approval is required before initiating any proceedings and second approval is required before giving any final finding on residential status of foreign company.”
    – Rakesh Bhargava, Director, Taxmann

 

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