Clarity still eludes PoEM coverage

PoEM is an internationally recognised test used to determine a foreign company's residential status

The determination of the Place of Effective Management (PoEM) of a company has a few loose ends, despite the Central Board of Direct Taxes (CBDT) giving the final guidelines on the matter last month.

“The circular has listed multiple factors for determining the PoEM, without defining the hierarchy and the weight of each factor. This is likely to make the exercise subjective and uncertain,” said Deepa Dalal, partner, transaction tax, EY India.

The guidelines say the PoEM is to be determined on a factual and yearly basis. For those having an “Active Business Outside India” (ABOI) or operations outside India, it will be assumed that the foreign company does not have a PoEM in India, if the majority of the board meetings are held outside India, with an active decision-making board. For those not engaged in ABOI, the guidelines prescribe twin tests: Identifying people who take key management and commercial decisions, and determining the place where these decisions are made. The PoEM will also be determined by considering activities performed over a period during the year in question.

“Since the language used in the guidelines is open to interpretation, there could be litigation with the Indian tax authorities on this issue. It would be advisable for corporates to relook at their operations and ensure that they are compliant,” said Maulik Doshi, partner, SKP Group.

The concept of PoEM is internationally recognised and is used to determine a foreign company’s residential status. Until April 1, 2016, a subsidiary or a parent of an Indian company was not subject to income tax in India unless its affairs were “wholly controlled and managed” in India. So, there was no tax incidence here unless the entire decision-making team was in India. Now if a company’s PoEM is in India, its global income will be taxable in the country.

For Indian companies that have made outbound investments, there is a risk that PoEM of such outbound investments could be considered to be in India in case the management of such overseas entities is determined to be in India. In case of foreign investments in India, there could be a risk that the entity from which the investment is made could have a PoEM in India. “The guidelines are silent on whether PoEM is also required to be demonstrated in the jurisdiction where such investment companies are located. MNCs generally nominate experts from multiple jurisdictions on the board of the investment companies. This could pose some challenges in satisfying the requirement that the holding companies in effect are managed from the same jurisdiction. For instance, majority of the board of directors could be resident outside the jurisdiction in which the investment holding company is incorporated,” said Dalal. Companies are gearing up to meet the new guidelines. Some are preparing to change directorship to ensure there are more local directors; others are decentralising power to empower local management and trying to take key strategic decisions by going to the particular overseas location. A few are even reevaluating their holding structures.

For example, if there are 10 investments being made in 10 different jurisdictions through the Mauritius route, then the Mauritius holding company structure is collapsed and investments are being directly routed through India. This is to avoid double taxation.

“Given that these guidelines have been issued in January 2017, it would have been ideal if these provisions would have been applied prospectively from financial year 2017-18 (assessment year 2018-19), which would have provided sufficient time to foreign companies having their PoEM in India to carry out compliances required under the tax laws,” said Doshi.