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
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.