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Government clarifies that provision to amend, cancel and withdrawal of SOFTEX forms is available to companies under the Export Date processing and monitoring system

 

In response to concerns raised by NASSCOM, RBI has confirmed that  that SEZ/STPI are permitted to report changes in SOFTEX in the EDPMS of RBI with proper flag indicating amendment /cancellation. These provisions are available under the following heads in the EDPMS system.

  • ‘Record indicator 1’ is for new data;
  • ‘Record indicator 2’ is for amendment;
  • ‘Record indicator 3’ is for cancellation of SOFTEX form.

 

Further, STPI has issues internal communication informing all the STPI directors about the availability of the facility of modification and cancellation of SOFTEX.  We urge you to contact your regional STPI offices for further clarifications in this regard and keep us posted about hurdles if any.

Taxability of a company depends on its residential status. Historically, a company was considered a resident of India if it was an Indian company (i.e. incorporated in India) or if its control and management in that year was situated wholly in India. Consequently, if a single board meeting of a foreign company was held outside India, it would not qualify as a resident for Indian tax purposes, even if it was otherwise controlled and managed from India.

 

With effect from Financial Year 2016-17, the place where a company’s Place of Effective Management (POEM) is located will determine its tax residency. POEM has been defined to mean ‘a place where key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made’.

 

Foreign company’s POEM is in India - Consequences

 

  1. The global income of the foreign company becomes taxable in India.
  2. The foreign company retains the status of a ‘foreign company’ for Indian tax purposes. Hence, the global income will be taxable at the rate of 40%, rather than 30% that applies to Indian companies. However, such a foreign company which has its POEM in India, is not regarded as a ‘domestic company’ under the Income-tax Act, 1961, and hence neither the Dividend Distribution Tax under section 115-O, nor the Buyback Tax under section 115QA ought to apply to it.
  3. Although credit for taxes paid in the foreign country (i.e. the country of incorporation) may be available, many of the foreign companies which have their POEM in India may be incorporated in low tax jurisdictions. Hence, despite the availability of credit, the incremental tax costs in India may be significant.
  4.       The foreign company’s ability to claim benefits under tax treaties entered into by its country of incorporation may be affected.

 

Determination of POEM

 

The definition of POEM as stated above is subjective. The Central Board of Direct Taxes issued a set of Guiding Principles to be followed for determination of POEM. Subsequently, some guidance was also issued on the computation of income and treatment of losses, depreciation, etc. in cases where the POEM of a foreign company is considered as being situated in India.

 

The manner for determining POEM depends on whether the foreign company is engaged in an Active Business outside India or not. If it is engaged in an active business, the rules for determining POEM are relatively simpler and objective and are based on where the board meetings of the company are held. If not, then a subjective and fact specific approach must be followed to determine its POEM. This is based on identifying the persons who take the key management decisions and determining where these decisions are infact made.

 

Conditions for a company to be regarded as engaged in Active Business outside India are:

  •       Its passive income (dividend, capital gains, interest, royalty, etc.) should not be >50% of its total income;
  •       < 50% of its total assets must be situated in India;
  •       < 50% of its total number of employees must be situated in India or are resident in India;
  •       Payroll expenses incurred on such employees should be < 50% of its total payroll expenditure.

 

POEM test will not apply to companies whose turnover or gross receipts is INR 500 million or less in a financial year.

 

Impact on the IT / ITES Sector

 

Risks

 

The POEM rules will primarily affect outbound investments. Since India’s IT/ITES sector is highly globalized, the impact of POEM test could be considerable.

 

Having said this, the risk of POEM may be highest in case of subsidiaries set up to hold investments / IP or to act as group financing vehicles in low tax jurisdictions.  Here, income of such subsidiaries largely comprises of dividends, interest or royalties, all of which are ‘passive’ in nature.

 

Other situations which could lead to POEM risks include:

  1. Where financial and strategic decisions are routinely elevated to the executives / directors of the ultimate parent entity;
  2.       Where the board of directors of overseas subsidiaries largely comprises of directors based in India, and board meetings are not often physically held abroad;
  3.       Board meetings are not held at all (for e.g. when local law in the foreign country does not envisage or require holding of frequent board meetings)

 

Challenges

 

The determination of POEM is a complex, time consuming and fact-specific exercise. Although the burden of establishing that the POEM of a company is situated in India is on the tax authorities, practically, it is important for the company to demonstrate from where it is being managed. This depends on factors such as its legal structure, management/reporting structure, actual conduct as well as available documentation.

 

Since the determination of POEM goes to the root of how a company is managed, much of the documentation required to substantiate this will contain significant confidential information. These could potentially be required to be submitted to the tax authorities and courts, if the question of POEM were to become contentious.

 

Takeaways and Next Steps

 

Three broad steps that are needed to to mitigate potential risks are:

 

Assessing risks:

Undertake a detailed assessment of any potential risks associated with POEM, including identification of entities that qualify for the active trade or business.

 

Documentation:

Put in place processes to ensure that appropriate documentation to substantiate the place of management is maintained. These could include ensuring that the Board Minutes and other supporting documents are maintained in sufficient detail along with back up information.

 

Restructuring:

The introduction of POEM could set the stage for possible restructuring of the organisational reporting structure. Reconstituting and strengthening boards and redrawing of reporting structures could be considered. The introduction of POEM does not necessarily envisage that a decentralised model of decision making is followed. But it does mean that functions are performed in accordance with a well-thought out governance framework, rather than on an ad hoc basis. 

 

Though the risks and challenges posed by the POEM are quite considerable, with well thought out strategies significant litigation and associated tax costs could be avoided.

 

Article contributed by:
Hariharan Gangadharan, Partner, Dhruva Advisors LLP

The Annual Union Budget exercise is round the corner.  This year has been a landmark year with the implementation of the new indirect tax regime GST and we have been in touch with you in understanding the legislative and procedural issues. We will be continuing that exercise and would be having a separate section on GST related issues.  You could continue to share your concerns for their inclusion in the pre-budget memorandum and our discussions with the Government.

 

On the direct tax front, there were several amendments during the year for eg (revised safe harbour provisions, final POEM rules, secondary adjustment guidelines, indirect transfer rules etc). We intend to capture the impact of these announcements and corresponding issues if any. Apart of from these we also need to understand from you issues apart from the amendments listed above.

 

The issues maybe presented in the following format with a clear segregation into Direct and Indirect taxes, by September 10, 2017 at policyquery@nasscom.in

Amended Safe Harbour rules for transfer pricing were announced by the Government today. Please see the details in attachment. 

Dear All,

 

Glad to share a communication received by NASSCOM from RBI which provides for an extension of the relaxation in the timeline for reconciliation of all export Transactions by all exporters till June 30, 2017.

 

You would be aware that the New Export Data Processing and Monitoring System (EDPMS) introduced by the Reserve Bank of India mandated for the reconciliation of all export Transactions files after Feb 2014 by 30th April, 2017.  Some of the NASSCOM member companies had highlighted serious capacity and system constraints due to which they were unable to meet the stipulated timelines and hence were facing the risk of being in the caution list.

 

NASSCOM Policy team in Delhi had raised the issue with RBI requesting for a relaxation in timelines. We are glad that our recommendations are considered. The existing extension / relaxation which is valid till June 30, 2017 is aimed at giving further time to AD banks to clear the entries in the EDPMS. The extension is operationalized as under (quoted from the RBI communication):

 

For any exporter, if the outstanding export bills’ amount is up to 20 per cent of total export bills or the number of open export bills is up to 10 as indicated in the caution list appearing in EDPMS site then AD should not treat such exporters as caution listed till June 30, 2017 subject to satisfaction of the AD based on following documentary evidence(s):

 

  1. The exporter has declared that the export proceeds have been realized in full for the export bills lying open in EDPMS and eBRC has been issued by bank/s.
  2. In cases where the bills are not realized / partially realized, then the exporter should have submitted request to AD bank(s) for (a) extension of time for realization of export bills and / or (b) request to AD bank(s) for write off of export bills (fully or partially, as the case may be).
  3. Request for cancellation of shipping bill has been submitted by the exporter.

 

Exporters not falling within above category  i.e. the outstanding export bills’ amount is more than 20 per cent of total export bills and the number of open export bills is more 10 but, are otherwise fulling the conditions at ( i ) to (iii) above shall have to obtain prior approval from RBI. In such cases, AD banks, after verifying above condition, may forward, the cases to RBI for exemption. AD banks have been advised to inform the exporters that their requests to RBI in this regard has necessarily to be routed through the former.

 

Concerns on part of the exporters listed by RBI (quoted from the RBI communication)

 

RBI has also raised with us some of the concerns and lapses on part of the exporters. We would request you to take note of these and ensure no lapses at your end.

 

  1. Prior to implementation of EDPMS in March 2014, export related data and status of exports were not available at a single platform, making the monitoring process difficult.
  2. EDPMS simplified the procedure for filling various returns related to export. Development of EDPMS facilitated the banks to report various returns to RBI through a single platform. In the system, the primary data on exports transactions including offsite software exports from all the sources viz. Customs/SEZ/STPI flow to RBI secured server and the same is available with the respective banks for follow up with the exporters. In the System, the document submission and realization of export proceeds is reported back by the AD banks to RBI through the same secured RBI server so as to facilitate follow up/ data generation. 
  3. The condition regarding caution listing of exporters, if the export bill is not realized beyond two years, is quite old. EDPMS, with the objective of automated processing and monitoring of export data, has only automated the caution listing process. 
  4. As full export proceeds have to be realized in 9 months (present stipulation), you would appreciate that 2 year is sufficiently long period to complete realization and get the requisite formalities complete post realization.
  5. We observe that exporters have been caution listed as they failed to realize full export proceeds, (ii) failed to approach AD banks for extension, (iii) failed to approach AD banks for invoice reduction / write-off (either partial or full), (iv) declared name of different AD bank at the time of initiation of export. Many did not realize that export proceeds have to be realized in full which was not the case. We understand that invoice reduction and invoice/ softex cancellation were not given due attention (the invoice reductions are on account of a) Volume Discount b) Bank charges c) Withholding tax and Invoice / Softex Cancellation are due to scenarios like a) Buyer accepted efforts and invoiced efforts are not matching b) Milestone value approved buyer and invoiced milestone differed c) Invoice rejected by buyer due to variation/change in PO number d) Change in Budget plan of the buyer e) Initial invoice wrongly raised). While for invoice reduction, the exporters should approach the AD bank, cancellation should come from STPI.
  6. Though, we do not want to save or hide inefficiencies of the AD banks in handling the matter by giving our comments at (e) above and they have to take bigger blame, we observe that for about 25 per cent of the cases, exporters have to complete formalities.
  7. The feature of automated caution listing though announced by the RBI in May 2016 and which was to be made effective from June 15, 2016 was to be deferred time and again by RBI in view of consistent representations from exporters and banks. We observe that no efforts were taken to sanitise the data in EDPMS in the interim, nor exporters thought of appreciating RBI’s Circular dated May 26, 2016 in this regard. The Supreme Court appointed SIT and other Government authorities were writing to RBI continuously to share the data of export unrealized but every time we have to plead before them for forbearance. Finally when the feature of automated caution listing was operationalized in EDPMS with effect from March 01, 2017, after giving sufficient time, all concerned were found unprepared.
  8. You should appreciate that even after 1 year from the date of announcement of automated caution listing, the data stand unreconciled involving around 16 lakh export bills.
  9. On the issue of multiple login-IDs for EDPMS, we inform that the same is not required as all bank branches are not required to work online on EDPMS (nor it is warranted). The application leverages IT systems of the banks. The User ID provided to the banks for EDPMS is required only at the time of down loading export data from EDPMS and, thereafter, the data has to be shared by the banks among their branches using their own networks for updation (at least two user IDs have been provided to most of the banks to download the data). The upload of updated data to EDPMS again requires single user ID of banks. Since, it is a batch process mechanism, once the updated data is uploaded (which is normally done in the evening by the banks).

After months of intellectual meanderings, it is here finally - Brexit. Initially it looked likely that the “remain” campaigners would win, having garnered support from none other than the British Prime Minister, the Labour Party and more than 50 per cent of Tory members. As the referendum date got nearer, a different picture emerged. The voices in support of the “leave” campaign became louder. And now it has happened!

 

India has reached that stage of economic maturity and integration with the global economy where it can no more remain insulated from major global shifts. This note provides a quick analysis of the facts, possible implications and what could impact our sector – positively or negatively. We will continue to track this and provide regular updates as things become clearer.

 

Facts:

  • Shock vote in the UK but again many were reading exit polls that are done in cities where people who participate in exit polls do not actually vote
  • People have voted more emotionally than based on economics. Intra EU migration has been a key factor behind the vote that caused people to ignore the advice of many political leaders, leading economists, intelligentsia and international luminaries. We need to understand the strength and causative factors of these emotions.
  • Brexit vote makes UK first country to leave the EU; EU Emergency meeting likely soon
  • Means deal negotiated by PM Cameron with the EU will not be implemented in the UK.
  • GBP is down 10% and Stock markets including FTSE, DAX & CAC opening 8-10% down today which means that UK recession is likely; even the Sensex is down
  • Euro is down 8% if that lasts can trigger EU recession as well
  • Yen has appreciated almost 5% against dollar at around 100 = $1 which ; more and it can trigger another recession in Japan
  • PM had earlier indicated that if UK voted in favour of Brexit, they would invoke Article 50 which means that UK will have 2 year to negotiate divorce thereafter; but in his statement outside 10, Downing Street after the vote, he announced that he would make way for a new leader by October who would then initiate action to invoke Article 50. Meanwhile assured stability, (though this may not calm nerves)
  • Exit terms of UK will only come through after Article 50 is invoked

 

What it means for the UK?

  • Mistake of making ‘referendum’ a binding commitment instead of mood-gauging tool
  • Political changes that would ensue in the wake of the vote at leadership and key cabinet positions. PM has already indicated that he would make way for new Prime Minister in next couple of months to let new leader to negotiate severance deal. Leavers like Boris Johnson, Michael Gove, Andrea Leadsom, Chris Grayling, Priti Patel and John Whittingdale are now likely to dominate the Government, lead exit negotiations and Leavers will be in a strong position in any leadership election.
  • The political career of his ally George Osborne is very cloudy. He cannot now be Cameron’s successor. Boris Johnson and Teresa May are most likely contenders, but the state of the party is so fragile and turbulent that predictions are very dangerous.
  • England voted overwhelmingly for exit, Wales voted for exit, though by a small margin, Northern Ireland voted to Remain by a small margin while Scotland voted overwhelmingly to Remain. This wide variation in preferences could open up old fault lines like Scotland revisiting the decision to remain within UK.
  • Downgrade of the UK by rating agencies possible
  • India would likely become a more important partner for UK

 

What it means for the EU?

  • Disintegration of EU could be triggered by one of the biggest constituents deciding to leave EU
  • Other countries may follow suit or hold similar referendum leading to more uncertainty
  • Biggest takeaway is  - Vote is against EU and its policies from a nation that was never a whole hearted member of the EU ; this vote is also against non-inclusive growth
  • EU without UK looks less attractive to India  so EU – India deal could be a casualty
  • EU will also struggle to sell itself with the deals that it has already negotiated and currently negotiating e.g. with Canada, Korea, TPP, TiSA
  • Another Greece type of crisis could accelerate disintegration of the EU
  • EU reactions to the vote would be important. Initial responses have been sober and mature and could moderate concerns of businesses

 

Global Issues to Watch out for in the near term

  1. 1.    UK recession
  2. 2.    Protectionism would gain ground as each country thinks about itself
  3. 3.    Trump win in the US
  4. 4.    Euro unravelling
  5. 5.    China crash landing

 

Likely response from Central Bankers

- US Fed may not hike rates for long – not before Dec’16

- UK could reduce rates and add some form of QE with it

- Japan could bring out QE to pump up liquidity and cash

- India might also join and cut rates

 

What it means for Indian IT  / India

- Every crisis presents opportunities as well

- Every such monumental move has two sides to it

 

Positives

  • With intra EU migration controlled / addressed there would be lesser pressure on the UK policy makers to curtail non EU migration of skilled workers over a period of time
  • EU Directive on Data Flows and regulations like GDPR recently released by the EU will no longer be binding on the UK which means data flows with the UK will not be an issue for Indian IT
  • UK regaining its sovereignty for fast tracking deals with favoured trading partner such as India; India UK FTA deal could move quickly as India has lesser reservations with aggressive interest of UK companies than from EU companies. 
  • Companies that operate in UK and Europe may need to tweak systems and underlying IT layers, which may open up business opportunity for Indian IT companies. However this will be phased over the exit plan.
  • Indian EU deal negotiation strategy can change as EU without UK is less attractive  – whether for Indian IT or India in general

 

 

 

Negatives

  • Likely decline in the value of the British Pound, which could render many existing contracts losing proposition unless they are renegotiated.
  • The uncertainty surrounding protracted negotiations on the terms of exit and/or future engagement with EU could impact decision making for large projects
  • Indian IT companies may need to establish separate headquarters/ operations for EU, may lead to some disinvestment from UK.
  • Skilled labour mobility across EU and UK could be impacted in the short term
  • Uncertainty about the relationship UK will have with the EU after the severance, will it be like Switzerland or Norway given that UK has been taking more or less its own decisions even while staying within EU
  • Disintegration of the UK and EU cannot be good for world economy and India

 

In conclusion

 

This is technically not a binding decision and will have to be endorsed by Parliament. There remains a slim chance that another renegotiation and second referendum might be on offer (the PM’s recent statement seems to be aimed at creating options), but it is more likely that an orderly departure will be agreed upon

 

The EU is likely to demand an immediate start of formal withdrawal negotiations under Article 50 of the EU Treaty.

 

The precise nature of relationships will not become clear for a while, but a trade agreement of some kind is essential for the UK and desirable for the EU.

 

Eurosceptic voices in the EU are heartened by this and the damage to the EU project more generally is immense and threatening. The likely response is for EU political elites to act together with more urgency to deflect further referendums being triggered.