Tax PoEM

Just when expectations were that the Place of Effective Management (PoEM) provision, first introduced in the Finance Act 2015, will be either amended or dropped altogether in the coming Budget, the Central Board of Direct Taxes has released guidelines for the same. PoEM is a test of the residential status of companies for the purpose of taxation. The 2015 budget amended the definition of a company’s residential status to include those whose place of effective management is in India, though they might be incorporated abroad. PoEM is defined as the place where key commercial and management decisions are made by a company for the purpose of its business. The guidelines issued earlier this week help determine the PoEM of a company. The original amendment to the test of residential status was triggered by the practice of companies or entities effectively operating out of India but incorporating themselves abroad to exploit a low or zero tax environment. It is to staunch the consequent leakage of tax revenue that the Centre introduced the concept of PoEM.

While the intent may be right, the question is whether the guidelines help advance the revenue’s objectives, and if yes, at what cost. For one, not all entities that are registered abroad are registered in tax havens. There are examples of startups and technology businesses that are incorporated or have their marketing offices in the US simply because it is necessary to do so for business reasons. Some of these may also have ambitions to list themselves in the US, in which case their incorporation there is understandable. The US, anyway, is not a tax haven. Yet, PoEM does not distinguish between these genuine cases and those registered in tax havens with the obvious intent to avoid taxes in India. Second, the guidelines set a minimum revenue threshold of ₹50 crore (approximately $7 million) for the PoEM test to be applied, which is way too low. Third, the guidelines ought to have been specifically targeted at entities registered in tax havens and those with passive income such as shell companies rather than across the spectrum.

Though there are safeguards built in by the guidelines such as the need for any proceedings to be first sanctioned by a commissioner and later approved by a collegium of senior officers, the fact is it can be seen as a tool of harassment by genuine businesses. The instructions to staff down the line has to be clear: the provisions should be applied only where they are absolutely justified. In an environment where the Government is focused on increasing the ease of doing business, which includes easing the complex tax laws, the misapplication of complex provisions such as PoEM can prove counter-productive. Finally, the Centre ought to consider favourably the request that applicability of the provision be pushed to fiscal 2017-18 as the guidelines have come too late in the current financial year for businesses to take a considered decision on the matter.

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