POEM, Round tripping

Subject: Economy

Context:

Round tripping of funds is made easier by digital transactions. India can stem tax erosion by using AI-driven tools

Concept:

Round tripping

• Money leaves the country through various channels such as inflated invoices, payments to shell companies overseas, the hawala route and so on. After cooling its heels overseas for a while, this money returns in a freshly laundered form; thus completing a round-trip.
• How does the money return to India? It could be invested in offshore funds that in turn invest in Indian assets. The Global Depository Receipts (GDR) and Participatory Notes (P-Notes) are some of the other routes that have been used in the past.

POEM:

Context:

Round tripping of funds have become easier by digital transactions. The RBI  is fighting a battle against problems created by round tripping of funds, involving money laundering by individuals with investments in overseas private equity venture capital or alternative investment funds coming back to India.

Concept:

Round Tripping:

In the context of black money, money leaves the country through various channels such as inflated invoices, payments to shell companies overseas, the hawala route and so on. After cooling its heels overseas for a while, this money returns in a freshly laundered form; thus completing a round-trip.

Externalisation

• It is a strategy of incorporating holding companies in offshore jurisdictions to enjoy certain benefits which the home country does not offer.
• The strategy is employed by companies to move their corporate structures away from the Indian tax and regulatory regimes.

POEM:

To curb (only to some extent) the loss to the exchequer by the externalization of Indian businesses, the new concept of ‘place of effective management’ has been introduced.

To determine the residential status of foreign companies, the Finance Act 2015 introduced the concept of place of effective management (POEM).

POEM is defined as the place where the key management and commercial decisions that are necessary for the conduct of business of an entity as a whole are, in substance made. Under POEM rules, overseas subsidiaries are treated as domestic entities for tax purposes if they are controlled and managed from India.