Deloitte recommends government to clear POEM guidelines

MUMBAI: At a time when many Indian companies who have a foreign arm are facing a lot of confusion around place of effective management (POEM), Deloitte India has recommended that the government undertake some steps in a couple of months to come.

"The POEM guidelines would be in the manner of a set of guiding principles for the assesses and the tax officials and would assist in interpretation and application of POEM in determining the tax residence of a foreign company in India. It is important that the guidelines provide sufficient clarity and appropriate safe harbours to avoid unnecessary litigation in India and abroad,” Parikshit Datta, senior director with Deloitte Touche Tohmatsu India said.

Under the POEM regulations any company that has a foreign subsidiary but is perceived to be controlling the subsidiary from India would be levied taxes as per Indian tax laws. Many Indian companies have already started taking certain steps fearing that their tax burden would go up substantially. While some companies have started appointing directors in the foreign subsidiaries others have started maintaining minutes of the meeting diligently in the foreign subsidiaries.

Deloitte, in the report, has asked the CBDT ( Central Board of Direct Taxes) to clear a couple of points as early as possible for Indian companies to operate smoothly. "The Finance Act, 2015 omitted the words 'at any time' which shall have effect that a company shall be resident in India if its PoEM is in India in the financial year under consideration. Nevertheless, a question may still arise that for a foreign company to be resident in India, is it necessary that the PoEM should be situated in India throughout the financial year under consideration or at any time in the year or mainly in India,” Deloitte recommended.

According to the report, the government should also define some of the key terms like 'Key', 'Effective', 'Key Management and Commercial Decisions' and 'Senior Management / Key Management Personnel's', in order to avoid any ambiguity with regards to their interpretation.

"Safe harbor provisions may be prescribed to avoid unnecessary compliance burden with no corresponding tax collection in India. For instance, PoEM should not be considered to be in India in cases where the foreign company is incorporated in a jurisdiction with a minimum base tax rate, say 20%, as India will in any case be required to grant foreign tax credit,” the report added.

The Deloitte have sent some eight recommendations to the government. ET had eearlier reported that the CBDT is expected to make changes to some of the POEM guidelines in the next 15 days.