The new POEM notification - Striking the right chord with foreign Cos?

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Budget 2015 refined the definition of a “resident company” by introducing the internationally accepted concept of Place of Effective Management (‘POEM’). Foreign companies have especially faced the heat as a result of this amendment with their global incomes still being taxed at the rate of 40% even if they are hit by POEM provisions. To allay some of the foreign companies concerns, CBDT recently initiated a consultation by issuing a draft notification  specifying tax consequences u/s 115JH in respect of POEM hit foreign companies. The draft notification provides for certain modifications/exceptions to the otherwise general tax rules (which apply to all Indian companies) like the manner of working out depreciation allowance, set off of accumulated losses, withholding tax provisions, etc.

Do you think the draft rules u/s 115JH adequately addresses concerns relating to tax liability determination of a POEM-hit foreign company? Is it fair to impose 40% tax-rate on a POEM hit foreign company, despite applicability of all other rules which are otherwise applicable to Indian companies? Do you think MAT exemption provided to foreign companies without PAN should be extended to POEM hit foreign companies as well? Owing to substantive nature of POEM rules, do you see the need to have a ‘special ruling mechanism’ of obtaining a ruling from a Panel, Tribunal or Court for determining POEM for the first time?  

K.R.Sekar
Partner, Deloitte Haskins & Sells LLP

One of the major point in case of POEM is computation of income for the companies which have residents under India law due to POEM. Though the draft circular has clarified certain provisions relating to computation which are welcome the circular need to give clarity on other aspects too.

The revised PoEM guidelines do provide a certain level of clarity on consequences of PoEM.  Brought forward losses or unabsorbed depreciation determined on the 1st day of the relevant previous year as per tax records/books shall be allowed to beset off and carried forward. The issue of double taxation is also addressed that the foreign tax credit as per the prescribed rules will be granted. These are definitely welcome.

However on a few other aspects, further deliberation may be required. For example, where a foreign company (having a PoEM in India) receives payments towards fees for technical services, the payer is required to deduct tax as per section 195 and not per section 194J. In this scenario, can the provisions of the tax treaty be applied? Similarly, another aspect that needs clarity is whether the  foreign company having a PoEM in India should withhold...

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Rajendra Nayak
Partner, International Tax Services, Ernst & Young LLP

Prior to the amendment by the Finance Act, 2016, the Indian tax law defined a resident company as a company incorporated in India, or a company whose control and management is situated wholly in India. The main criticism of this definition was that it was subject to relatively simple, formalistic criteria. The Finance Act, 2016 has sought to amend the definition by regarding a company incorporated outside India as resident in India, if the territorial nexus of that company with India is established by virtue of its place of effective management (POEM) being in India. The CBDT thereafter issued guidelines for determination of POEM, after obtaining public comments on a discussion draft. The guidelines emphasize that the test of POEM is one of “substance over form” and is to be determined with regard to the facts and circumstances of each case on a yearly basis. The guidelines. The guidelines sought to strike the right balance between providing certainty to taxpayers as well as ensuring that offshore companies with no substance or activities, which are controlled from India, are subject to Indian tax jurisdiction. The CBDT has now released draft notification for comments on the special provisions that...

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Krishan Malhotra
Senior Partner, Dhruva Advisors LLP

In order to curb creation of shell companies abroad and align the provisions of domestic tax laws of India with various Double Tax Avoidance Agreements and international standards, with effect from financial year 2016-17, a foreign company is considered as a tax resident of India, if its place of effective management (‘POEM’) is in India. In this regard, the final guidelines for determination of POEM were issued on 24 January 2017. However, while there was a separate provision introduced to enable the Central Government to prescribe the tax regime for such companies (computation of total income, treatment of unabsorbed depreciation etc.), the Government has only now issued a draft notification on this subject.

Some of the key takeaways of the notification are highlighted below:

· Clarity has been provided in relation to determination of WDV of depreciable assets, brought forward loss, unabsorbed depreciation, carry forward/ set-off and maintenance of profit and loss account and balance sheet.

· Where more than one provisions relating to withholding of taxes apply to the foreign company as a resident as well as a foreign company, the provisions...

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Uday Ved
Chartered Accountant

POEM Guiding principles have been issued by CBDT which extensively discuss issues when POEM will be applicable and it also provides sufficient guidance to address fears and concerns of foreign companies being subject to POEM. It will also be helpful to India outbound matters.

CBDT has now issued a draft Notification dated 15th June, 2017 to address some issues relating to carry forward of losses, withholding tax provisions, etc. The approach of CBDT to issue such notifications and guidance is a welcome step and shows the maturing and transparent approach on the part of Tax administration as well as addresses computation issues and accordingly, determination of tax liability sufficiently.

The POEM is a tax avoidance measure and hence, applying a tax rate of 40%, a rate applicable to a foreign company is perfectly fine. This can act as a 'prevention mechanism' particularly in cases where Indian residents want to park funds in shell companies in tax havens abroad and avoid getting foreign income being subject to tax in India.

The draft notification addresses issues relating to claim of depreciation and carry forward of losses. In a case, where the foreign company...

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Girish Vanvari
Partner & Head- Tax, KPMG in India

Recently, the Central Board of Direct Taxes (CBDT) has issued a press release and a draft notification providing for exception, modification and adaptation for application of provisions of the Act in case where a foreign company is said to be a resident in India on account of Place of Effective Management (POEM).The draft notification states that the foreign company will be eligible for depreciation, brought forward and unabsorbed depreciation as per tax records in the foreign country or as per books of accounts maintained in accordance with the laws of the foreign country, as the case may be. The draft notification provides clarity with respect to accounting year to be taken.These transitional provisions would also cover any subsequent previous year upto the date of determination of POEM in an assessment proceeding.The draft notification provides that where more than one TDS related provisions of Chapter XVII-B of the Income-tax Act, 1961 (the Act) apply to the foreign company as resident as well as foreign company, the provisions applicable to the foreign company shall apply. Also, it is proposed to allow foreign tax credit under Section 90/91 of the Act. Section 195(2) relating to making an...

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