Union Budget 2017: Final PoEM guidelines have come as a surprise

Published: February 4, 2017 3:53:53 AM

Though PoEM can’t be triggered without adequate evaluation, the guidelines have little on the appellate process

Overseas-incorporated entities held to have PoEM in India would face challenges over the tax rate applicable on computed income, MAT applicability, etc. (Reuters)Overseas-incorporated entities held to have PoEM in India would face challenges over the tax rate applicable on computed income, MAT applicability, etc. (Reuters)

The government started the year by notifying the final guidelines for determination of Place of Effective Management (PoEM). The final guidelines, though anticipated, come as a surprise, contrary to the expectations that they will be subsumed under anti-avoidance measures such as General Anti Avoidance Rules (GAAR) or Controlled Foreign Company (CFC).

The main objective of introducing PoEM, was to ensure that the companies incorporated outside India, but controlled and managed from India do not escape taxation in India. It also brings in the concept of residency of corporates in line with internationally-accepted principles.

The guidelines prescribed to determine PoEM of a non-resident is indeed welcome as it ushers in certainty for foreign investors in terms of applicability and the procedure to be followed by the revenue authorities. The final guidelines address some of the issues highlighted by the stakeholders, such as determination of PoEM in case of back-office/support services, existence of PE, meaning of certain terms, methods used in the active/passive business tests, shareholders activity, etc.

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The principle of “substance over form” has been reiterated for the determination of PoEM. Although quantitative criteria have been prescribed to determine key terms such as ‘active business’, subjecting the same to factual criteria would lead to ambiguities.

While the press release had prescribed an annual turnover limit of less than R500 million for non-applicability of PoEM provisions, specific provisions to this effect remains absent in the final guidelines. This instance shows that the intent of the government and the enactment are different.

The fact that an assessing officer needs to obtain approvals from a three-member panel consisting of senior officers (principal commissioner/commissioner I-T), indicates that PoEM would not be triggered without adequate evaluation. However, the existing framework does not provide for a specific appellate remedy with respect to the order of this panel. In such an event, taxpayers would be forced to adopt traditional remedies such as taking the matter up with the Dispute Resolution Panel (DRP) or CIT (Appeals). The DRP, CIT (Appeals) and the panel consist of officers of similar rank and this thus could create hierarchical dichotomy. We hope that the government would rectify this and enact specific carve-outs (akin to the appellate process in GAAR provisions) enabling direct appeal to the ITAT.

The final guidelines leave room for ambiguity as they strive to provide clarity on some of the issues and terms relevant for determining PoEM. Overseas-incorporated entities held to have

PoEM in India would face some of the following challenges:

– Tax rate to be applied on computed income

– Applicability of minimum alternate tax (MAT) provisions, given foreign companies are outside the ambit of MAT (in the absence of Permanent Establishment in India)

– Applicability of Dividend Distribution Tax on payments made by such companies to overseas group entities

– Set-off of claims for foreign taxes paid by such companies

– Applicability of transfer pricing provisions versus specified domestic transactions

– Consequential withholding tax implications

Reiteration of the substance principle shows that the government to adopt steps towards the implementation of the anti-avoidance measures. Further, with the release of the final guidelines, one will now have to wait and watch as to what is in store with respect to the anti-avoidance measures namely GAAR, CFC rules and implementation of the Base Erosion and Profit Shifting (BEPS) action plan.

Pallavi Singhal
With contributions from Akhil Kedia, manager, and Vivek Gupta, assistant manager, PwC
The author is partner (direct tax), PwC India. Views are personal

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