Tax experts have sought greater clarity from Central Board of Direct Taxes (CBDT) on draft Place of Effective Management (PoEM) norms that aim to determine the tax residency of companies, and said that a set of objective criteria be put in place before implementing them.

They have also suggested that detailed FAQs be brought out on various provisions.

The CBDT should provide guidance with regard to expressions like “management and commercial decisions” and “conduct of company’s business as a whole” as interpretation of these expressions might lead to more litigations, they said.

Two-stage process

The draft guidelines on PoEM, to assess a company’s tax liability, have suggested a two-stage process.

According to the draft, the first stage would identify the persons who make the key management and take commercial decisions for the company. The second stage will determine the place where these decisions are made.

An important concept

Tax residency, said KPMG India’s Tax Partner Vikas Vasal, “is an important concept for determining the taxation of any entity in India, therefore, the basis for determining the tax residency should be simple, clear and easy to apply.

“Though residential status is to be determined based on the facts and circumstances of a particular case, it is imperative that objective criterion be laid out to determine PoEM, to the extent feasible, to avoid uncertainty and potential litigation,” he said.

‘New from an Indian perspective’

American Chamber of Commerce (AMCHAM) in its suggestions to the CBDT has said: “Given that the changes proposed are new from an Indian perspective, appropriate guidelines or Frequently Asked Questions should be issued to provide clarity to the taxpayers on various questions relating to PoEM.”

Ashok Maheshwary & Associates Managing Partner Amit Maheshwari said that the CBDT should not go ahead with the implementation of draft PoEM guidelines as it would go against the non-adversarial tax regime which the government is trying to promote.

Don’t put norms in place or defer PoEM

“The draft guidelines in the current form should not be implemented or PoEM should be postponed. There is a risk of subjectivity in the whole process and the tax authorities at the lower level have been very aggressive in the past. This is bound to increase tax disputes and may not bode well for the non-adversarial tax regime which the government is trying to showcase,” Mr. Maheshwari said.

Mr. Vasal suggested there should be greater clarity on active and passive income for the purpose of determination of residency of a company.

Protect genuine business models

“It is important that genuine business models and transactions are protected. Accordingly, the concept of passive income in the guidelines require some reconsideration,” he said.

Mr. Vasal further suggested that royalty income arising from licensing of Intellectual Property Rights or other assets, software payments and telecom charges etc, should not be treated as passive income.