Cos Work Out Strate­gies to Beat PoEM Blues

While some firms en­sure In­dian res­i­dent direc­tors at­tend board meet­ing of for­eign arms, oth­ers show such en­ti­ties are in­de­pen­dently man­aged

The Economic Times - - Companies: Pursuit Of Profit - Sachin.Dave@ times­group.com

Mum­bai: At an In­dian multi­na­tional (MNC) that owns a for­eign sub­sidiary through a com­pany regis­tered in Sin­ga­pore, this is an un­set­tling time. Se­nior ex­ec­u­tives are prepar­ing to visit the is­land coun­try to at­tend a board meet­ing that’s been or­gan­ised out­side In­dia for the first time.

In Ben­galuru, se­nior ex­ec­u­tives at a prom­i­nent startup hud­dle to­gether every week to dis­cuss a po­ten­tially dis­rup­tive mat­ter.

In both the cases, the com­pa­nies are star­ing at a likely tax li­a­bil­ity in the com­ing year on ac­count of a new reg­u­la­tion — Place of Ef­fecti- ve Man­age­ment or PoEM. This is a frame­work to de­ter­mine the tax payable by a for­eign com­pany that for all pur­poses is man­aged from In­dia and yet does not pay tax do­mes­ti­cally. Many In­dian com­pa­nies that have tra­di­tion­ally used hold­ing com­pa­nies and sub­sidiaries over­seas for var­i­ous rea­sons are as­sess­ing how they may be af­fected and are rac­ing to put new struc­tures in place be­fore they come un­der scru­tiny from next year.

“For in­stance, multi­na­tion­als are now en­sur­ing that In­dian res­i­dent direc­tors phys­i­cally at­tend the board meet­ings of the over­seas com­pa­nies as they oth­er­wise risk get­ting ex­posed to PoEM,” said Jatin Kan­abar, a part­ner at Deloitte Has- Only com­pa­nies with more than in an­nual rev­enue may be li­able to pay tax un­der PoEM kins & Sells. Some com­pa­nies would be af­fected more be­cause they have tra­di­tion­ally in­vested out­side In­dia for ex­pan­sion, said ex­perts. Only com­pa­nies with more than .₹ 50 crore in an­nual rev­enue may be li­able to pay tax un­der PoEM.

“Sev­eral star­tups, phar­ma­ceu­ti­cal and in­for­ma­tion tech­nol­ogy com­pa­nies that have sub­sidiaries out­side In­dia with more than .₹ 50 crore in rev­enue, but are ef­fec­tively man­aged from In­dia, could face scru­tiny from the tax de­part­ment un­der PoEM guide­lines. Many of these com­pa­nies could cre­ate sub­stance in lo­ca­tions out­side In­dia and show that they are in­de­pen­dently man­aged to not be re­quired to pay do­mes­tic taxes,” said Am­r­ish Shah, se­nior ad­vi­sor, trans­ac­tion tax, EY. While the gov­ern­ment has said that op­er­a­tional sub­sidiaries of In­dian multi­na­tion­als won’t be tar­geted, many such units are held via passthrough com­pa­nies regis­tered in tax-friendly coun­tries.

“The in­tent is not to tar­get In­dian multi­na­tion­als which are en­gaged in busi­ness ac­tiv­ity out­side In­dia but to tar­get shell com­pa­nies which are cre­ated to re­tain in­come out­side In­dia. PoEM reg­u­la­tions may be tar­geted more to­wards com­pa­nies with pas­sive in­come as com­pared to op­er­a­tional sub­sidiaries of In­dian multi­na­tion­als,” said Kan­abar.

50 crore

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