Place of Effective Management (POEM)
Finance Bill 2015 proposal to introduce the concept of POEM shall materially alter conditions for determining the residency of foreign incorporated companies. This in turn will directly impact income attribution principles and bring to tax income, which otherwise is not taxable under the extant law. The concept of POEM was first introduced in the draft Direct Tax Code (DTC) in 2009.
The concept of POEM is seen frequently prevalent in domestic legislation of several countries, particularly the OCED member countries. POEM is used as an effective anti -abuse rule to prevent tax payers from taking advantage of liberal residency rules applicable to foreign branches, operating in source countries.
Experience of OECD nations on POEM is different than for India. Firstly, due to restrictive provisions under Exchange Controls and FDI regulations, limited activities can be undertaken by foreign companies operating in India as branches. Hence, the concept of POEM which would tend to bring income to tax in India under the residency rules (as prescribed under POEM) could be premature. Secondly, bringing POEM as an integral part of source based taxation principles defeats the underlying intent of it being an anti-abuse provision.
New regulations should be thoroughly researched and its underlying intent clearly spelt out. Do we have a data to suggest that presently there is tax leakage under the current residency rules and if yes, POEM should be used as anti-avoidance rule in line with OECD principles?
If the draft bill gets passed by Parliament, MoF will have to carefully calibrate POEM intent and draft guidelines to ensure that POEM is indeed an anti-avoidance rule and that there is clarity in computing income under such rules.
We can ill afford uncertainty in the tax policy, at this juncture, given the larger messaging from senior most functionaries in the new government.