We're not yet ready for PoEM PDF Print E-mail
Tuesday, 19 January 2016 10:05
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As the finance minister readies for his third Budget, Mukesh Butani, managing partner at BMR Legal, has some important suggestions. He tells Siddhartha P Saikia & Sunil Jain that, while the concept of the Place of Effective Management (PoEM) is in keeping with global norms, India is still not ready for it, and it can become another tool for harassing taxpayers. He talks of how his firm is growing—it has 36-39 partners and billings are growing in double digits—and says that, despite some obvious negatives, the government is moving in the right direction in several cases. Excerpts:

Is PoEM a good idea?

It has lots of problems and, from even an ease of doing business perspective, it means subjecting the overseas subsidiaries of Indian firms to burdensome compliance … we will also be discouraging MNCs from locating their headquarters or regional functions in India.

So you’re saying a Corus or a JLR can be taxed in India? But if their Boards are not run out of India, where is the question of taxing them … aren’t the rules clear?

The rules are nebulous. For example, in case of M&M, Anand Mahindra does not take all decisions. He has a set of professionals, who may or may not be on the Board. And they may be located in India or overseas. This becomes a very subjective exercise. An innovative taxman can say though JLR is a UK-based company, its PoEM is situated in India.

What happens if I hold a Board meeting via video-conferencing? This is permissible under the law. What if my Board doesn’t take strategic decisions? The law also says that if the PoEM is in India as well as overseas, it would be presumed it is in India. It adds two layers of subjectivity—it presumes to be in India and predominantly in India. In the case of Suzuki, what happens if RC Bhargava is on the Suzuki Board?

Before you legislate a law, there should be some meaningful background impact analysis as to how much is the leakage of tax. Like transfer pricing, PoEM is an anti-avoidance law. Why is Indian business so afraid of it? Because we have a poor record of implementation of these laws.

But haven’t we fixed such subjective issues in the case of transfer pricing through various guidelines from time to time?

We brought the transfer pricing statute in 2001, but we brought in the concept of Advance Pricing Agreements only in 2013! We have 500 APA applications, but we have disposed off only 50 or so, and none of these are bilateral APAs. Certainly, the guidelines have helped a lot in the case of transfer pricing, but look at the delays and the damage caused as a result.

A Safe Harbour committee was also set up to fix transfer pricing margins.

It was set up to resolve past disputes. Suppose a taxpayer is running a captive BPO in India and paying tax at cost+10%, while the taxman said it will be cost+20%. The Safe Harbour committee said that it would be resolved with tolerance limits with each industry. But this didn’t work since what was recommended by the committee was also too high—the idea was to bring this down, and this is now being done, after two years.

If the government wants the Safe Harbour to succeed, it has to have some formula. Safe Harbour is a very scientific exercise. For example, if a BPO is rendering some financial services, you have to see what margin these businesses are working on? We should prescribe a limit which is encouraging for people to come forward, pay their taxes and move on. Now, when you prescribe a limit which is too high, the taxpayer prefers to go to the tribunal. In many cases, after the case has gone to the tribunal, the margins approved by the tribunals are lower than the Safe Harbour limits.

Now that the guidance has been given, one of my recommendations is that these should be made applicable to past cases as well, because courts are taking cognisance of this.

Is the government arm-twisting Vodafone/Cairn when it talks of a settlement … after all, even the government admits the retrospective tax is a bad idea.

I do not know what kind of settlement is being talked of, but given the headlines these two cases have grabbed, the world is looking at which direction the settlement is headed. First of all, it should be a time-bound settlement. And if the government cannot settle, let the courts decide. The issue with international arbitration is that any award has to be implemented by Indian courts. In both White Industries and Antrix, the arbitration awards have been given, but not implemented.

Vodafone’s case is that we went through the legal process and got a positive decision. Now, the lawmakers have gone and over-ridden that decision. As far as we are concerned, we have become victims of change of government’s stand.
So, what should the government do?

The Justice Easwar Committee was set up to look at aspects of the law that lead to high litigation in India. This committee has submitted an interim report so that some part of this can be incorporated into the Budget. The government has taken a series of steps to address the functioning of the dispute resolution panel and it has considerably improved.

I’ll give you an example. Oilfields’ service contracts are liable for 10% deemed profit taxation, but the taxman said they should be taxed at 35%. After the Supreme Court gave an order that these are business income and not technical services, the dispute resolution panels are taking cognisance of it and overriding the decisions of their officers.
I have also seen a trend where, after the tribunal decisions, the technical committee that decides further appeals should be filed is taking a view that the government should not file more appeals. This was an unheard phenomenon, but in the last six months, it has become a reality—not challenging the Bombay High Court on both Vodafone and Shell were big signals from the government.

Raising the thresholds—Rs 10 lakh for tribunals and Rs 20 lakh for high courts—has also been an important reform. Overnight, thousands of cases are getting disposed off in the tribunals. As of today, there are some 80,000 appeals across various tribunals. It is anticipated that with this single move, which is an administrative step, over one-third of the cases would go away.

To get back to Vodafone and Cairn, does our law even have a provision for an out-of-court settlement?

Under the I-T law, there is no concept of out-of-court settlement. Anybody can file a PIL against it, and that is the government’s concern. The courts will have no option but to examine it.

What the government seems to be arguing is that while there is no provision under the I-T law, Parliament has the power to make the law. So, let’s come to an agreement and, once it works, get all kinds of cushioning—the AG’s opinion, the Cabinet—and then go to Parliament.

The government’s proposition to settle both Vodafone and Cairn is very sensible before it goes on trial in the international arbitration. The key here is time. The world is watching these two cases. And the decisions are going to play a lot in the minds of investors. Whatever the government wants to do, it must do it sensibly and quickly.

Any thoughts on the Budget?

This year’s Budget has to be transformational in terms of laying down the tax reform agenda for the next 2-3 years. What the finance minister announced last year—the reduction in corporate tax rates, accompanied by reduction in tax breaks—was a big change and every business got impacted.


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