Draft POEM Guidelines - Will it soothe the frayed nerves of MNCs/India Inc?

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The eagerly awaited guidelines for determining place of effective management (POEM) have been released by CBDT for public consultation. The final rules would form the basis for determining residence of companies (other than Indian companies), with effect from April 1, 2015 ! The draft-guidelines prescribe a quantitative and objective initial threshold of 'active business outside India', followed by the test of a majority of the Board meetings. The draft-guidelines thereafter provide several criteria (to be evaluated based on specific facts) for identifying persons who actually make key management and commercial decisions and then determining the place where these decisions are actually made.  The draft-guidelines re-iterate "substance over form" approach at multiple places and reject the adoption of a 'snap-shot' approach.
Will the POEM guidelines achieve the desired objective of effectively plugging tax avoidance through artificial escaping of Indian residence? Do these draft rules alleviate some the boardroom concerns vis-a-vis POEM implementation or will it necessitate more careful tax planning?  Do these guidelines effective address challenges arising due to modern day technologies and communication channels and dynamic business circumstances? And finally, will the AO having to run his POEM orders past the Principal Commissioner, prove to be a sufficient deterrent?


Gautam Doshi
Group MD, Reliance Anil Dhirubhai Ambani Group

“Place of Effective Management (POEM) is a tie breaker test - a test difficult to apply to which reference is made only in difficult circumstances - when all normal tests fail to identify the country of Residence. Amended Section 6(3) seeks to make far more extensive use of this test as the default test and not as a test of the last resort and therein lies the rub. It is a concept which can be understood and felt but, a concept which is not amenable to an objective description. Given this impediment CBDT have done a commendable effort at trying to specify criteria which Assessing Officers and assessees can use. But, at the end it would appear that one is not wiser - there is no magic wand which can be used to apply the test.

The draft guidelines also do not address the issue of determining POEM for companies which do not need and are not actively managed. If in such cases the default of the location of the activities of the company  - investments held outside India or trade carried on outside India - or the location of accounting records is, as is suggested, adopted as the basis,  POEM will fail to capture those companies which benefit/serve residents as non-resident (and consequently, non-taxable) alter egos. Sooner rather than later Government will have to consider whether introduction and extensive use of CFC would be a better tool to achieve the objectives sought to be achieved. Perhaps CFC will have to replace POEM.

To put it differently, the draft guidelines make a valiant attempt to use POEM without causing harassment but, may not succeed in achieving the goal of catching those who escape the tax net by effective use of foreign companies and the rules of Residence.

Presently, except for guiding companies to document the decision making process and ensure that they hold/record the Board Meetings outside India, there is no other guidance which would indicate the likelihood of POEM being applied or which would ensure avoidance of application of POEM. Oversight by the Commissioner/Principal Commissioner has not been an effective safeguard in most matters and there is no reason why things would be different in cases where POEM is sought to be invoked but, as indicated, the application of the guidelines is not likely to result in a situation requiring a safeguard."