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PoEM, from verse to worse PDF Print E-mail
Tuesday, 05 January 2016 01:00
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The potential for taxpayer harassment is huge

 

Revenue secretary Hasmukh Adhia is probably right when he says, as he did to this newspaper, that every country has left room for discretion in its rules for Place of Effective Management (PoEM). Indeed, no one can object to PoEM in principle, just as no one can object to General Anti-Avoidance Rules (GAAR). PoEM needs to be put in place to ensure that firms being effectively run out of India pay their taxes here and not overseas, and GAAR is needed to ensure taxpayers don’t disguise their transactions in order to escape paying taxes. And yet, in his last budget, finance minister Arun Jaitley announced that, as a result of the fears addressed by corporates, GAAR would be put on hold for two years. Why? Because, though GAAR is something desirable in principle, it is so subjective and open to interpretation by the taxman, it is almost certain to be abused. Transfer pricing (TP) rules, similarly, are along the same lines as GAAR, but it is when TP orders asked companies to add back R1.7 lakh crore to their incomes just between FY12 and FY14 that the government realised the enormity of the problem—so when R23,000 crore of such orders were struck down by the Bombay High Court in the Shell and Vodafone TP cases in 2014, the government decided not to appeal them. One way out is to, as the central government is now doing on TP, keep issuing advisories, and examples, to the taxman on what is not subject to TP orders. Which is why, in the case of PoEM, the draft guidelines—to which comments are being sought till later this week—say “the fact that a foreign company is completely owned by an Indian company will not be conclusive evidence that the conditions for establishing PoEM in India have been satisfied”.

The problem, and that is why PoEM needs to be put in abeyance if not scrapped, is that there is still way too much discretion. The draft rules say the location of the board meetings is usually a good way to determine PoEM provided the board “retains and exercises its authority to govern the company” and “does, in substance, make the key management and commercial decisions”. Just imagine the potential for harassment if each company is to provide the taxman not just details of where board meetings are held, but to prove the boards of companies are “in substance” making key decisions—even if it is finally proven the companies do not have to pay tax in India, just the paperwork for this will be a nightmare.

All of this may still make sense if there were huge tax losses for which PoEM rules were required. In the US, for instance, the Citizens for Tax Justice regularly puts out reports on how much tax the country is losing with top corporates not paying taxes and using all manner of tax dodges/shields. And this ‘loss’ then needs to be put in perspective by examining the extra jobs and investment that have got created in India—given the large tax exemptions India gives to corporates, at a policy level, investment and job creation is given a higher priority. But if we don’t even know what the loss of tax revenue is due to PoEM, why is one more potential tool of tax oppression being created? That’s something both the finance minister and the prime minister need to think about.

 

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