POEM: Grey areas raise concerns

Ambiguities in proposed regulations to determine residential status on MNCs would lead to avoidable subjectivity and litigation, say observers

The recently issued draft guidelines on defining the Place Of Effective Management (POEM) for multinational companies (MNCs) are ambiguous, feel observers.

The term is used to determine a foreign company's residential status. It was introduced into the rules here from the Union Budget of 2015-16. These guidelines would apply to companies whose operations are outside India but are controlled by Indians or could apply to foreign MNCs with a regional controlling centre in India.

Suppose there is a holding company situated in India, with a subsidiary in US. Assume it has raised money from shareholders, saying it would be utilised for an aerated drinks business run by the US subsidiary. The holding company would have to ensure the investment goes into that business. Even such decisions might go into deciding POEM. Yet, says Rahul Garg of Price Waterhouse India, "These decisions should not form part of POEM because holding companies will have to keep reviewing whether investments are going in the right direction or not."

Such decisions do not make holding companies a controller or manager of the subsidiary, he added However, the recent draft guidelines do not specifically say these decisions would be out of POEM.

The guidelines say: "If on the basis of facts and circumstances it is established that the board of directors are standing aside and not exercising their powers of management and such powers are being exercised by either the holding company or any other person resident in India, then the place of effective management shall be considered to be in India."

Rakesh Nangia of Nangia & Co said although the draft aims to provide a comprehensive set of factors to determine POEM for an offshore company, a more detailed listing of parameters at the grassroot level might be necessary to ensure minimal conflict in implementing these.

"Otherwise, it could leave scope for ambiguities and varied interpretation, opening doors for litigation," he said.

Another issue which could arise is on taxation. Though the draft guidelines provide for resolving the issue of residency by India and other countries in case of conflict, these do not have any mechanism to deal with matters in between. For example, a subsidiary of an Indian MNC is in London, resident in the UK and liable to pay tax there. But, if the POEM lies in this country, Delhi would call for tax. The matter could be settled under the double tax avoidance agreement (DTAA) between the two countries but would take some time.

"What happens in between? And, whether tax in one country could be taken as a credit in the other, is not clear from the draft norms," said Parikshit Datta, senior director, Deloitte in India.

Experts do not believe POEM would lead to shifting of location of a business. Datta felt it would not lead to significant shifts in location, since tough rules under base erosion and profit shifting have already been signed between countries, to be implemented from 2017.

However, Garg said, India becoming a jurisdiction of regional controller offices of MNCs might get a setback.
CONTROL ISSUES

• The finance ministry recently issued draft guidelines to plug avoidance of taxes by those companies which have place of effective management in India, but are located outside
• These guidelines basically apply to foreign subsidiaries of Indian MNCs and India-based regional control centres of foreign MNCs
• To assess that a company has active business outside India, guidelines suggest a few tests-
  

* Passive income -rent, interest, royalty-is not more than 50% of total income
* Less than 50% of total employees situated in India
* Less than 50% of total assets are situated in India

Place Of Effective Management (POEM) is taken as outside India if the majority meetings of the board of directors of the company are held outside India

However, if on the basis of facts and circumstances it is established that the board of directors of the company are standing aside and not exercising their powers of management and such powers are being exercised by either the holding company or any other resident in India, then POEM will be taken in India and company would be liable to be taxed in India