PoEM not to rhyme well for cross-border businesses, says ASSOCHAM seeking its withdrawal

As the new ‘ Place of Effective Management (PoEM) law ,meant to be anti-tax avoidance tool and pre-empting creation of shell companies abroad can create complex problems for genuine businesses across different jurisdictions, the ASSOCHAM has asked the government to revert back to the old rules which were easy to follow with a minimum of litigation.

The new PoEM provision, passed as part of the Finance Act of 2015, would adversely impact the Indian companies which have set up their operations outside India.“The so-called PoEM may have the best of intentions to stop tax avoidance, but its implementation can create problems which can then lead to a counter-criticism on India being tax-unfriendly to global companies. As it is, our taxation dispensation with issues like retrospective implementation, has attracted quite a bit of criticism,” ASSOCHAM Secretary General Mr D S Rawat said.

The chamber has submitted its views on the draft guidelines on the PoEM , conveying to the tax authorities to withdraw the complicated tax rules .Determination of POEM is very complicated and would open another sphere for litigation in India, which Indian economy can ill-afford at this stage. It will significantly increase compliance costs both for taxpayers and the revenue, it said.

PoEM, should be made applicable only to blatant cases of avoidance through shell companies which are incorporated outside India but controlled and managed from India. This will help in avoiding misapplication of these provisions. Further, it should be clarified that there has to be a clear basis for assessment of POEM to trigger. It cannot be outcome of a roving and fishing inquiry.

The tax authorities should clarify the type of entities which have been found to be abusing the said loophole in section 6(3) of the Act and for which these changes in law are being made  e.g. Outbound Intermediate Holding Companies, IPR Holding Companies., marketing or distribution/service companies etc. operating in overseas jurisdictions.

As the object of introducing POEM is to target shell structures in low/nil tax jurisdictions it will be worthwhile to keep entities in comparable tax jurisdictions outside the reach of POEM. The principle that POEM is a deterrent measure and not a revenue raiser should always be kept in mind.

Safe harbour provisions may be prescribed to avoid unnecessary compliance burden with no corresponding tax collection in India.

As the Guidelines are still in a draft stage and there are only three months for the close of the financial year, it is recommended that the amendment under consideration be made effective from a later stage, if at all the government wants to go ahead with the same. The PoEM being a new concept in Indian tax scape, this would ensure that the taxpayers get adequate time to assimilate the changes.