Agenda 1 Setting the context 2 Key Challenges

Presentation on tax issues – Inbound & Outbound December, 2013
MITSUI – Vedanta Deal In April 2007, Japan-based Mitsui sold its 51 per cent share in miner Sesa Goa to the UK’s Vedanta Group for $981 million. The deal was routed through Finsider International, a company incorporated in the UK, which held Sesa Goa shares. Vedanta bought 100 per cent in Finsider. The tax dispute arose on whether tax is payable on the deal in India and the matter is pending before the Bombay High Court SAB MILLER DEAL In 2006, SABMiller had acquired 100 per cent shares in Foster’s India, the Indian arm of Foster’s Australia. The deal was between two international firms outside India but the assets were within the country. The I-T department demanded $39.5 million tax on the $120-million deal. The matter is currently before the Bombay High Court SANOFI AVENTIS Similarly, in 2009, French drug maker Sanofi Aventis picked up a controlling stake in Hyderabad-based vaccine maker Shantha Biotechnics, for $783 million. The deal was routed through a special purpose vehicle created by Merieux Alliance of France, which held 90 per cent in the Indian company. The tax department had raised a demand of Rs 700 crore as withholding tax from Sanofi. The Authority for Advance Rulings (AAR) affirmed the view. The I-T department claim was challenged by Sanofi and the matter is now with the Andhra Pradesh High Court KRAFT-CADBURY In January 2010, Kraft took over British company Cadbury for around $19 billion, following which the I-T department had sent a notice to Cadbury India and its overseas parent Kraft Foods Inc, seeking details of the deal. The notice was the result of a directive from the finance ministry after a public interest petition was filed in the Delhi High Court in 2010 claiming that Kraft had illegally avoided tax liabilities related to the sale of shares and capital assets in India. However, US-based Kraft Foods Inc had said that it owed no taxes to the Indian tax department. This is being assessed by the international taxation department.

Agenda 1 Setting the context 2 Key Challenges
3 Key Considerations for inbound investments 4 Forms of business presence for foreign companies MITSUI – Vedanta Deal In April 2007, Japan-based Mitsui sold its 51 per cent share in miner Sesa Goa to the UK’s Vedanta Group for $981 million. The deal was routed through Finsider International, a company incorporated in the UK, which held Sesa Goa shares. Vedanta bought 100 per cent in Finsider. The tax dispute arose on whether tax is payable on the deal in India and the matter is pending before the Bombay High Court SAB MILLER DEAL In 2006, SABMiller had acquired 100 per cent shares in Foster’s India, the Indian arm of Foster’s Australia. The deal was between two international firms outside India but the assets were within the country. The I-T department demanded $39.5 million tax on the $120-million deal. The matter is currently before the Bombay High Court SANOFI AVENTIS Similarly, in 2009, French drug maker Sanofi Aventis picked up a controlling stake in Hyderabad-based vaccine maker Shantha Biotechnics, for $783 million. The deal was routed through a special purpose vehicle created by Merieux Alliance of France, which held 90 per cent in the Indian company. The tax department had raised a demand of Rs 700 crore as withholding tax from Sanofi. The Authority for Advance Rulings (AAR) affirmed the view. The I-T department claim was challenged by Sanofi and the matter is now with the Andhra Pradesh High Court KRAFT-CADBURY In January 2010, Kraft took over British company Cadbury for around $19 billion, following which the I-T department had sent a notice to Cadbury India and its overseas parent Kraft Foods Inc, seeking details of the deal. The notice was the result of a directive from the finance ministry after a public interest petition was filed in the Delhi High Court in 2010 claiming that Kraft had illegally avoided tax liabilities related to the sale of shares and capital assets in India. However, US-based Kraft Foods Inc had said that it owed no taxes to the Indian tax department. This is being assessed by the international taxation department. 5 Capital structuring 6 Cross border tax issues

Agenda…. (Contd.) 7 Indirect transfer of shares 8
Acquisition tax issues Key considerations for outbound investments 9 10 Forms of business presence overseas MITSUI – Vedanta Deal In April 2007, Japan-based Mitsui sold its 51 per cent share in miner Sesa Goa to the UK’s Vedanta Group for $981 million. The deal was routed through Finsider International, a company incorporated in the UK, which held Sesa Goa shares. Vedanta bought 100 per cent in Finsider. The tax dispute arose on whether tax is payable on the deal in India and the matter is pending before the Bombay High Court SAB MILLER DEAL In 2006, SABMiller had acquired 100 per cent shares in Foster’s India, the Indian arm of Foster’s Australia. The deal was between two international firms outside India but the assets were within the country. The I-T department demanded $39.5 million tax on the $120-million deal. The matter is currently before the Bombay High Court SANOFI AVENTIS Similarly, in 2009, French drug maker Sanofi Aventis picked up a controlling stake in Hyderabad-based vaccine maker Shantha Biotechnics, for $783 million. The deal was routed through a special purpose vehicle created by Merieux Alliance of France, which held 90 per cent in the Indian company. The tax department had raised a demand of Rs 700 crore as withholding tax from Sanofi. The Authority for Advance Rulings (AAR) affirmed the view. The I-T department claim was challenged by Sanofi and the matter is now with the Andhra Pradesh High Court KRAFT-CADBURY In January 2010, Kraft took over British company Cadbury for around $19 billion, following which the I-T department had sent a notice to Cadbury India and its overseas parent Kraft Foods Inc, seeking details of the deal. The notice was the result of a directive from the finance ministry after a public interest petition was filed in the Delhi High Court in 2010 claiming that Kraft had illegally avoided tax liabilities related to the sale of shares and capital assets in India. However, US-based Kraft Foods Inc had said that it owed no taxes to the Indian tax department. This is being assessed by the international taxation department. 11 Use of International holding company 12 Proposed Direct Tax Code - Impact on outbound investments

Setting the Context

Setting the Context… the Indian tax climate
Introduction of GAAR provisions – substance over form Tax on indirect transfer – ambiguity in provisions Retrospective amendments – uncertainty on investment structure Transfer pricing legislations/ litigations – impact on structures Proposed CFC Regulations – planning future investments? Eligibility to Treaty benefits and unilateral treaty override Dynamic and evolving tax environment to impact present and future investment cycle

Key Challenges

Key Challenges Effective tax rate of 33.99% for domestic companies and 43.26% for foreign companies Additionally levy of Dividend distribution tax 16.99% on domestic companies brings the ETR to 43.5% Use of tax treaties for planning investments Vs. eligibility of benefits Capital structuring Vs. tax impact of returns Withholding tax obligations in India on interest, royalties, fee for technical services, requirement of obtaining a PAN in India Tax incentives available under the domestic tax regime

Key Challenges Acquisition tax issues where presence is via inorganic route Exit taxes on share 20% Vs. 30% Tax laws in the home country of the investor relating to outbound investments viz. CFC, tax credits Retrospective amendments impacting established structures Rising litigation and uncertain tax positions Ambiguity surrounding new laws and lack of well defined rules

Key considerations – planning inbound investments

Key considerations Factors impacting decision making Economic
Political Cultural Legal Financial Technology System Stability Philosophy Risk Social Ethics Religion Diversity Resources Purchasing power Exchange rates Demographics Corporate Laws Regulations Tax Laws Judiciary Fund availability Investor value Banking Growth rate Savings Capital formation Labour Laws Environment Factors impacting decision making

Inbound investment life cycle
Getting Started Structuring Repatriation Exit Grooming Entry Strategy Appropriate jurisdiction planning Eligibility to claim tax treaty benefits Available Entry Routes – FDI, FII, FVCI Time Frame Regulatory Outlook Deal pricing Adherence to prescribed benchmark price/ floor price Tax efficiency Availability of business losses and unabsorbed depreciation Instruments/ Modes of funding – Equity, Convertibles, Debt, Warrants, FCEBs, FCCBs Commercial objectives Modes of Repatriation Periodic/ steady cash flows – Dividends, Interest Periodic/ selective buy-back Growth capital with bullet payment at the end of the investment horizon Planning tax efficiency Timing Income characterization – a critical determinant Exit options Floatation Buy-back Secondary market/ trade sale Pricing Planning tax efficiency Regulatory implications

Questions to be answered?
Form of entity to be established – business presence in India? Form of Instrument in which investment to be made – Equity, Debt, Preferred Capital Whether to invest directly or through an Intermediate Holding Company (‘IHC’) Structure the tax considerations effectively during the lifecycle of the India investment Repatriation and exit strategies

Key Challenges Maximising shareholder value
Minimising global tax costs Alignment with investor objectives Ease in intra-group funds flow Considerations for fundraising Determination of efficient intermediate jurisdictions for positioning of SPVs Compliance with tax, regulatory and legal framework in India and in the relevant host country

Forms of business presence

Entity options Wholly owned subsidiary Joint Venture Branch Office / Project Office Liaison Office Other Options Technology Transfer & Licensing Agreement Services Agreement

Unincorporated entities Incorporated entities Particulars Liaison Office Project Office Branch Office Wholly owned subsidiary/ Joint Venture Activities Representation/ communication only Execution of specific projects Specified permissible activities Automatic/ prior approval route Taxation Generally a non-taxable presence 43.26% 33.99% plus DDT % Limited Liability Partnership Act, 2008 enacted in 2009 LLPs combine limited liability of companies and flexibility of partnerships FDI in LLP permitted subject to prior FIPB Approval

Wholly owned subsidiary/ Joint Venture
Forms of business presence – a comparison Particulars Liaison Office Project Office Branch Office Wholly owned subsidiary/ Joint Venture Purpose Liaison activities i.e. it acts as a channel of communication Executing a project in India Permitted RBI activities - export, import, consultancy research etc. Permitted to carry out wide number of activities subject to FDI guidelines Legal form Extension of the Parent Separate legal entity Taxable presence Does not per se result in taxable presence Taxed as an independent legal entity Tax rates NA - Purpose is not income earning Rates applicable to Foreign company Exit taxes NA - since not permitted to carry out any income generating activities Required to file tax clearance certificate No requirement of filing tax clearance certificate as tax arrears are recovered on winding up

Ideal form of business presence? – Establishment of Liaison Office
Case Study 1 – Form of business presence F Co. (UK) F Co. is an exporter of finished goods. Contracts executed in home country Exports finished goods Requires temporary space for executing marketing activities in exporting countries India China Sri Lanka Ideal form of business presence? – Establishment of Liaison Office

Capital structuring

Funding instruments Equity Shares – same class or different classes of shares A Compulsorily Convertible Preference Shares (‘CCPS’) B Compulsorily Convertible Debentures (‘CCDs’) C External Commercial Borrowings (‘ECB’) D Based on the commercial tax and regulatory considerations the capital structure can be in the form of any of the above or a mix of the above instruments

Funding instruments Impact of Financials Companies Act, 1956
KEY PARAMETERS Companies Act, 1956 Income Tax Act, 1961 Stamp Duty FEMA

Funding instruments Equity Instruments Debt Instruments
Equity Shares Compulsorily Convertible Preference Shares (‘CCPS’) Compulsorily Fully Convertible Debentures (‘FCD’) External Commercial Borrowings (‘ECB’) Withdrawal of funds Generally not possible during company’s lifespan Cannot be redeemed prior to conversion Cannot be redeemed prior to conversion Minimum average maturity period prescribed Generally permitted for capex purposes in real/ industrial/ infrastructure sector. Not permitted for working capital etc. End-use restrictions None None None

Funding instruments - Comparison
Parameters Equity CCPS CCD (Quasi-debt) ECB Nature of instrument Essentially considered as a part of Share Capital A debt instrument with a right to convert into Equity Debt instrument Nature of return Dividend exempt for shareholders Dividend received if any will be exempt in the hands of investors (Shareholders) Interest received if any till conversion would be taxable Dividend received post conversion to equity will have same treatment as for an equity instrument Interest received be taxable Deductibility of cost of raising capital Non tax deductible Interest allowed as deduction (arm’s length- as per transfer pricing principle) Dividend not deductible Interest allowed as deduction (arm’s length- as per transfer pricing principle)

Funding instruments Parameters Equity CCPS CCD (Quasi-debt) ECB
Tax rate DDT % by distributing company on the amount of dividends Not taxable in the hands of shareholders Same as for equity Interest – as per treaty rates Dividend post conversion - same as equity Interest – as per treaty rates or 10% Deductibility Dividends and DDT not deductible Same as equity Interest tax deductible Tax implication in the hands of shareholder at the time of repayment of capital Buyback – results in distribution tax of 22.66% on the company; Exemption to shareholder Capital reduction – deemed dividend tax to extent of profits and balance taxed as capital gains for shareholder Capital Gains tax liability at the time of redemption in the hands of shareholders No DDT at the time of redemption if redeemed at issue price Post conversion to equity – same as for equity No tax implications on repayment

F Co. to infuse funds in form of CCDs in I Co.
Case Study 2 – Funding through Convertible Debentures F Co. F Co. to infuse funds in form of CCDs in I Co. Can excessive use of CCDs as part of capital structure come under GAAR scrutiny Interest paid on CCDs Infusion of funds through CCDs Overseas India I Co. Denial of interest benefit to I Co. on re-characterization of debt to equity ?

Repatriation strategies

Repatriation strategies
Various modes of cash repatriation to Parent Company Dividend distribution 1 Share transfer 4 Royalty/ Fee for Technical Services 2 Buy back of shares 5 Interest 3 Capital reduction 6 Imperative to evaluate the tax implications under respective treaties

Cash repatriation 1 2 3 4 Dividend Distribution Buy Back Capital Reduction Purchase of asset from overseas company DDT applicable @ % Tax applicable on the company distributing such dividend Tax on distributed income @ % (consideration less amount received by company on issue of shares) Tax applicable on the company carrying out such buyback % to the extent of accumulated profits / Capital gains tax as per applicable rates Requires sanction of the High Court Could be tax efficient subject to eligibility of treaty benefits (e.g. – sale of shares by a Singapore tax resident company) Feasibility from a commercial perspective will need to be evaluated? Distribution tax applicable to the company carrying out buy back

Cash repatriation Traditionally, MNCs have used shares buyback as a profit repatriation tool Window of tax free repatriation on “Buyback” closed on account of introduction of Tax on Share Buyback under section 115QA of the Income Tax Act Tax to be levied with effect from , on share buyback undertaken in accordance with the provisions of section 77A of the Companies Act, 1956 Tax to be levied on the company undertaking the share buyback at 22.66% on ‘Distributed Income’ Computation mechanism - Consideration paid by the company for buy back of shares less: Issue price at which company had issued shares to its shareholders i.e. amount received by the company on original issue Indian Company shall be liable to pay tax on the income distributed by way of Buy Back; No tax in the hands of the shareholder

Case Study 3 – Buyback of shares from a treaty country
F Co. IHC to buyback its shares from I Co. Overseas IHC can claim the benefit of the applicable tax treaty Intermediate Holding Company (IHC) As per applicable tax treaty(favorable tax jurisdiction),capital gain may not be taxable in India Buyback of shares Favorable tax jurisdiction However capital gain will be taxable in India in case of buyback of shares from a non treaty country India I Co. Distribution tax applicable on buyback – Finance Act 2013

Case study 4 – Inbound lifecycle
Transaction Company headquartered in UK with global operations wants to enter into India in the logistics space with an Indian Joint venture partner Objectives What form of business presence should it establish in India? Should it invest directly or through an intermediate jurisdiction? Minimization of capital gains tax costs relating to the funds/ earnings from future divestments or exit from the JV Structure the flow-back of returns in a tax efficient manner

Step 1 – Deciding the form of presence to be established in India UK Co. UK Co. Overseas Overseas India JV Partner India JV Partner Indian Co. LLP Setting up a presence in the form of a subsidiary Setting up a presence in the form of a LLP, which would be subject to approvals

Step 2 – Funding the Indian Co. viz. capital structure Deciding the capital structure (%) between the Foreign and Indian partner – Equity Vs. Convertible Returns expected – Dividend Vs. Interest Deductibility for Indian Co. Transfer pricing the interest payments Structuring further funding requirements and Target shareholding between partners Valuations on exit - FDI Vs. Tax Max is DCF Min is BNW UK Co. Overseas India JV Partner y% X% Indian Co.

UK directly investing into Indian Co. UK investing via Singapore
Case study 4 – Inbound lifecycle Step 3 – Deciding the need for an intermediate jurisdiction UK Co. UK Co. Overseas Singapore India Overseas India Indian Co. Indian Co. UK directly investing into Indian Co. UK investing via Singapore

India - UK Vs. India -Singapore Withholding rates for revenue streams – Dividend, Royalty/ FTS, Interest Treaty CGT Royalty/ FTS Interest Singapore Only in Singapore 10% 10%-15% UK Both states 10%-20% Taxability under local laws Corporate tax rates – 17% Vs. 23% Evaluate exemption for foreign dividends WHT on dividends paid further – no WHT in Singapore Evaluate CFC laws for parent company

Stake sale by UK Vs. buy back Stake sale by Singapore Vs. buy back
Case study 4 – Inbound lifecycle Step 4– Repatriation and exit taxes UK Co. UK Co. Overseas Singapore India Overseas India Indian Co. Indian Co. Stake sale by UK Vs. buy back Stake sale by Singapore Vs. buy back

Case study 5 – Inbound presence via Acquisition
Transaction – Acquisition of shares Vs. business Acquirer purchases shares from existing shareholders Consideration flows directly to shareholder Shareholder Indian company Acquirer Shares Transfer of shares Consideration

Acquirer perspective Accumulated tax losses, if any, may be lost consequent to change in shareholding In case of listed company, Takeover Code provisions could be attracted, depending on percentage stake being acquired Seller perspective Capital gains = Sale consideration – cost of acquisition (inflation shelter available where holding period exceeds 12 months) Transaction cost Stamp duty at 0.25% of total consideration; exemption for dematerialised shares

Transfer of business under slump sale
Case study 5 – Inbound presence via Acquisition Transaction – Acquisition of shares Vs. business Acquirer incorporates a new Indian company and infuses equity The New company acquires the business from the seller company (going concern basis) Alternately, one could acquire assets and liabilities Shareholder Indian company Acquirer New Company Transfer of business under slump sale Consideration

Acquirer perspective Depreciation to be claimed on the basis of valuation Accumulated tax losses, if any, will not be available for acquirer; continue in Indian Company Seller perspective Capital gains = Sale consideration – net worth of business Transaction costs Sales tax may not be payable on sale of business as going concern Stamp duty on consideration subject to evaluation

Transfer of assets & liabilities
Case study 5 – Inbound presence via Acquisition Transaction – Acquisition of shares Vs. business Instead of acquiring the operations (lock, stock and barrel), the acquirer purchases specific assets/ liabilities Shareholder Indian company Acquirer New Company Transfer of assets & liabilities Consideration

Acquirer perspective Depreciation claimed on the basis of consideration allocated to assets Accumulated tax losses, if any, will not be available for acquirer; continue in Indian Company Seller perspective Taxed as business income Vs. capital gain depending on nature of asset Transaction costs Sales tax could be levied Stamp duty on consideration subject to evaluation

Shares Business Assets Step-up of depreciation No Yes Availability of benefit of tax losses Conditional No – continues in Seller co Sales Tax Stamp duty Yes – on shares Yes – subject to evaluation Yes - subject to evaluation 1 Open to dispute 2 Based on type of entity and extent of acquisition

Cross border tax issues

Exit taxes – Capital gains Income Characterisation
Key Challenges Exit taxes – Capital gains Income Characterisation Deputation issues Withholding tax Taxable presence - PE Cross border tax

Tax treaty network What is the position / taxability under domestic law? Is there a tax treaty with the country of the NR? Is the treaty / applicable provision in effect? Is the NR a ‘person’ under the treaty? Is the NR a ‘resident’ of the foreign country under the treaty? Are other eligibility criteria (e.g. LOB article) met? Are the relevant taxes covered in the treaty? Read and apply the relevant article Check for Protocols / Technical Explanations / MoU Is there an MFN Article? If yes, are there beneficial provisions in qualifying later treaties that can be applied?

Capital gains – sale of shares
What investors look for Country Capital gains – sale of shares Royalty FTS Interest Singapore Alienator State 10% 10%/15% Mauritius 15% No article Rate not prescribed UK Taxable in both States 15%-20% 0%-15% Netherlands Taxable in both States on transfer of 10% or more shares to resident Taxable in Alienator State in case of corporate reorganization (Subject to holding of at least 10%) Luxembourg

Royalty & FTS DTAA need not be applied No
Opt for DTAA if more beneficial Taxable under the Act? Taxable under DTAA Opt for Act if more beneficial Analyze DTAA Yes Not taxable under DTAA

Royalty rates as per domestic tax laws
Enhanced withholding tax rate of Royalty and FTS payments (Finance Act, 2013) Under existing provisions of Section 115A, rate of deduction of tax at source for royalty and Fee for Technical Services (‘FTS’) were based on the date of contract; Section 115A of the Act has been amended by the Finance Act, 2013 to enhance the rate of deduction of tax at source; Nature of income Contract entered before May 31, 1997 Contract entered on or after May 31, 1997 but before June 1, 2005 Contract entered on or after June 1, 2005 New rate pursuant to amendment by Finance Act, 2013 Royalty 30% 20% 10% 25% FTS Note: All rates are exclusive of applicable surcharge and education cess

Royalty & FTS Resident State Source State PE in source state
Primary right to tax with the country of residence Source State Most treaties provide the country of source to levy tax up to a maximum level on a gross basis PE in source state Where the right, property or contract giving rise to royalty is effectively connected to PE of foreign company, then taxable as business profits (on net income basis)

Right of the states to tax
Royalty & FTS Right of the states to tax Royalties arising in a Contracting State and paid to a resident of the other Contracting State may be taxed in that other State. However, such royalties may also be taxed in the Contracting State in which they arise and according to the laws of that State but if the recipient is the beneficial owner of the royalties, the tax so charged shall not exceed percent (the percentage is to be established through bilateral negotiations) of the gross amount of the royalties. The competent authorities of the Contracting States shall by mutual agreement settle the mode of application of this limitation.

Article 12 - Royalties and fees for technical services
Royalty & FTS Article 12 - Royalties and fees for technical services ‘Royalties’ is typically defined to mean payments of any kind received as a consideration for use of or right to use: any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting any patent, trade mark, design or model, plan, secret formula or process or for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experience Term ‘fees for technical services’ is typically defined to mean payments of any kind received as a consideration for rendering of any managerial, technical or consultancy services including provision of services by technical or other personnel but does not include payments for services mentioned in Article 14 (Independent Personal Services) and 15 (Dependent Personal Services)

Act or DTAA whichever is more beneficial
Royalty & FTS Act or DTAA whichever is more beneficial Rate Arbitrage Rates under the respective DTAA may be lower than the rates under the Act Definition arbitrage Definition under the DTAA may be narrower than the definition under the Act

40% on net basis, if PE exists 40% on net basis, if PE exists
Royalty & FTS Rate Arbitrage Income Tax Act DTAA 40% on net basis, if PE exists 40% on net basis, if PE exists Rate as applicable 25% on gross basis

Royalty & FTS Definition Arbitrage Income Tax Act DTAA
Transfer of all rights Only use of or right to use is covered Patent, invention, model, design, secret formula, or process or trade mark or similar property or similar property is not used Copyright or copyrighted material Only copyright is covered Presence of make available clause Absence of make available clause

Royalty & FTS – make available as a concept
“Included Services” defined narrowly to mean services which “make available” technical knowledge, experience, skill, know-how or processes or which consist of development and transfer of technical plan or technical design MoU of the India USA Tax Treaty: Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology Provision of requiring technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available Use of a product which embodies technology shall not per se be considered to make the technology available If the services do not “make available” technical knowledge, etc., then, they are outside the ambit of FIS Article and not taxable Plethora of decisions on the subject

I Co. is engaged in business of prospecting and mining of minerals
Case Study – FTS in case of treaty country F Co. I Co. is engaged in business of prospecting and mining of minerals I Co. enters into agreement with F Co. for providing geophysical data for extracting minerals Payment of consideration Rendering of technical services Singapore However, no technical expertise/ skills rendered by F Co. to attract tax liability (CIT vs. De Beers India Minerals Pvt. Ltd.) India Extraction of minerals I Co. ‘Make Available’ should enable the person acquiring the service to apply the technology contained therein – India Singapore DTAA

Revenue taxed the payment received from customers as royalty
Case Study – Transfer of software (a copyrighted article) F Co. Indian branch office of F Co. licensed the customized software's to the Indian customers Revenue taxed the payment received from customers as royalty Import of software package as floppy/ CD US Court observed that license was non-exclusive and non transferable and licensee was permitted to make only one copy of the software India Branch Office A mere case of transfer of copyrighted article without any transfer of copyright and hence cannot be taxed as royalty (DIT v. Infrasoft Limited) Payment Customers Granting of copyright is in nature of royalty vis-à-vis transfer of copyrighted article is in nature of sale

Permanent Establishment issues
Article 5 - Permanent Establishment (‘PE’) Paragraph 1: General definition of a PE: “A ‘fixed place of business’ through which the business of an enterprise is wholly or partly carried on…” Above definition indicates following: There must be a place of business - eg: premises, facilities, installations etc; The premises etc may not be necessarily owned Place of business must be fixed and there must be a certain degree of permanence; Long duration of 18 to 24 months would comply with the ‘permanence’ test and any duration lesser than 6 months can not be considered sufficient Business of enterprise must be carried on through this ‘fixed place of business’ - Persons who are dependent on enterprise carry on business of enterprise through a fixed place of business in the country

Paragraph 2 - Examples of a PE Place of management Branch Office Factory Workshop Mine, an oil & gas well, a quarry or any other place of extraction of natural resources Warehouse in relation to persons performing storage facilities for others Farm, plantation or other place where agriculture, forestry, plantation or related activities are carried on Store or premises used as sales outlet Services PE: In some treaties like India-UK, India-US etc furnishing of services (other than those categorized as royalty or fee for technical services) through employees or other personnel provided for a period longer than 90 days within any 12 month period result in a PE

Paragraph 3 - Exclusions from definition of PE Use of facilities solely for purpose of storage or display of goods or merchandise belonging to enterprise Maintenance of a stock of goods or merchandise belonging to enterprise solely for purpose of storage or display Maintenance of a stock goods or merchandise belonging to enterprise for purposes of processing by another enterprise Maintenance of a fixed place of business solely for purpose of purchasing goods or merchandise or of collecting information, for enterprise Maintenance of a fixed place of business solely for purpose of advertising, for supply of information, for scientific research or for carrying on for enterprise any other activity of a preparatory or auxiliary character

Deputation issues – Inbound

Characteristics of Secondment
Obligation to complete Warranty for quality of work Service arrangement Add cost to complete unfinished work Supervision, Control, Direction, Authority to instruct, Review Right, Responsibility, Risk, Rewards Power to disqualify, replacement and recall Commercial justification: Specific or general Qualification of Secondee IPR ownership Cost or mark-up Right of Lien on foreign employment Economic Employer

Deputation issues Facts
Parent Co (P Co) enters into a Technical Support Agreement with Subsidiary Co (Sub Co) Also seconds its permanent staff as executive directors / senior management (qualified engineers) for routine operations and administration of Sub Co No formal Secondment agreement is executed Salary of seconded staff paid by P Co, subsequently reimbursed by Sub Co Basic employment agreement between seconded staff and Sub Co Issue Seconded employees treated as ‘technical support/services’ from parent company and thus reimbursement of salary/expenses gets treated as ‘fee for technical services’ which is subject to withholding tax Potential risk of Permanent Establishment (PE) for parent company since employees posted in India

Deputation issues Some pointers
Through the secondment agreement, the P Co, relinquishes its key rights (viz. termination, determination of salary and job responsibilities, renewal of employment, reporting) in favour and at behest of Sub Co; indicate that secondments are not consequent to the TSA between P Co and Sub Co. agree that salary/ expenses paid by P Co will be reimbursed on a cost to cost basis The TSA must specify scope of services/nature of support to be provided by P Co, in a manner that the support services are mutually exclusive to secondment Through the employment agreement, the Sub Co must exhibit that it Possess sole right to fix or agree to specific scope of work, salary, termination criteria, reporting norms for the seconded employee Treats the seconded employee at par with other employees

Deputation issues Substance of the agreement and intention of the parties Whether the arrangement can be termed as a FTS Scope of FTS under the Treaty Whether the activity results in a PE

Rendering of services Vs. provision of services
Deputation issues Rendering of services Vs. provision of services Provision of services – to be considered under Fees for technical services Rendering of services – to be considered under Dependent Personal Services Tests Which entity bears the responsibility or risk for the results produced by the individuals work; Which entity has the authority to instruct the individual; Which entity controls and has responsibility for the place at which the work is performed; .Which entity bears, in an economic sense, the cost of the remuneration paid to the individual; Which entity provides the tools and materials required to perform the work at the individual's disposal and Which entity determines the number and qualification of the individuals performing work Test of Real employer

Deputation issues A typical secondment arrangement
The overseas employer remains the legal employer, to maintain continuity of employment for purpose of social security schemes or other employment benefits; Indian company becomes the economic employer, which means that employee works under direct control and supervision of the Indian Subsidiary. The overseas company is not responsible for the work and performance of the employee. The risk and reward of the work done by the seconded employee would go to the Indian Company. The Indian Company has the right to demand the replacement of the employee and parent company also retains the right to replace or terminate the employee. However, for administrative convenience the seconded employee remains on the payroll of the overseas company. The parent overseas company pays salary to the seconded employee which is reimbursed on cost- to-cost basis by the Indian Subsidiary. Certain local benefits, such as accommodation, local conveyance, etc., are provided locally by the Indian Subsidiary to such seconded employee.

Deputation issues Contentions of revenue
That reimbursement of salary by the Indian Subsidiary to the parent overseas company is actually payment for technical or managerial or consultancy services That services performed by the seconded employee are actually performed on behalf of the parent company and not as an employee of the Indian Company That the amount received by the parent company is, in fact, receipt of income and further, that payment of the salary is only application of the income on which employee is liable to tax as per his nature of income and residential status That Indian subsidiary is not legal employer and, therefore, payment by the Indian company to overseas company could not be construed to be reimbursement of the salary. That the parent company has the right of dismissal and further, in the absence of obligation of the Indian company to pay salary to the employee, it cannot be said to be an economic employer. Right of the seconded employees to seek their salaries is against the parent overseas company and they cannot claim it as a right against the Indian Company.

Deputation issues Favourable rulings
That agreement between the Indian Company and overseas parent company is an agreement for secondment of staff and not agreement for rendering of services by the parent overseas company Reimbursement of salary on cost-to-cost basis cannot be regarded as Fees for Technical services. Seconded employee works under direct control, supervision and instructions of the Indian Company which exercises the right to - hire or accept secondees, right to control, supervise, instruct and terminate secondees from secondment and is liable on its own account for their performance Real and economic employer Vs. legal employer. That in this context, substance should prevail over the form, i.e., employer should be the person who is having the rights on the work produced and bearing the relative responsibility and the risks. That parent company opts to remain legal employer to protect their interest relating to benefit of pension contributions, social security and other benefits under laws of the home country That overseas parent company does not render any service to the Indian enterprise and is only paying salary to the seconded employee for administrative convenience

Service PE Service PE under the OECD Model Tax Convention and the UN Model Tax Convention OECD Model Tax Convention – No specific provision for service PE UN Model Convention – Does not use the expression “service PE” – Article 5(3)(b) of the UN Model Convention reads as follows: The furnishing of services, including consultancy services, by an enterprise through employees or other personnel engaged by the enterprise for such purpose, but only if activities of that nature continues (for the same or a connected project) within the country for a period or periods aggregating more than six (6) months within any twelve (12) month period Service PE under DTAAs between India and other countries Rationale is to tax the enterprise of the home country for its economic activities in the host country beyond a threshold limit When is a service PE deemed to be concluded?

Service PE is included in the DTAAs between India and other countries:
Australia – Article 5(3) Canada – Article 5(2)(l) China – Article 5(2)(k) United States of America – Article 5(2)(l) United Kingdom – Article 5(2)(k) Switzerland – Article 5(2)(l) Singapore – Article 5(6) Norway – Article 5(3)(b) Indonesia – Article 5(5) Service PE is included in the DTAAs between India and other countries:

Service PE Country Services provided to a non-related enterprise
Services provided to a related enterprise Australia More than ninety (90) days within any twelve (12) month period One (1) day Canada Singapore more than ninety (90) days within any fiscal year More than thirty (30) days in a fiscal year China More than one hundred and eighty-three (183) days Not provided Norway Six (6) months within any twelve (12) month period United Kingdom More than ninety (90) days in a twelve (12) month period More than thirty (30) days in a twelve (12) month period United States of America

Service PE DTAAs signed by India with the following countries specifically exclude certain categories of services from the Service PE Clause: United Kingdom – excludes services covered under Article 13 of the DTAA (Royalties and fees for technical services) Singapore – excludes supervisory activities in relation to building sites, etc., covered under Article 5(4) and services in relation to exploration covered under Article 5(5) Australia – excludes services in respect of which payments or credits that are royalties as defined in Article 12 Canada – excludes services covered under Article 12 (Royalties and fees for included services) China - excludes technical services as defined in Article 12 (Royalties and Fees for Technical Services)

Case Study- Verizon Data Services
Background Verizon India is a wholly owned subsidiary of Verizon Data Services LLC, US (“Verizon US”), was engaged in business of software development and maintenance for the telecom industry and certain information technology enabled services. All such services rendered by Verizon India were exported to Verizon US. For optimizing efficiency and productivity in the system Verizon India entered into a secondment agreement with the Verizon US Such employees were seconded by GTE Overseas Corporation, US (“GTE-OC”), an affiliate of Verizon US. The first employee was appointed as the managing director and the role of the other two were to liaise between the applicant and Verizon US GTE US would remunerate the employees, and in turn the applicant was to reimburse GTE US for the salary paid or provided to the employee.. Verizon US GTE US Personnel India Reimbursement Verizon (India) 74

Case Study - Verizon Data Services (contd.)
Ruling Payments not in the nature of reimbursement Receipt in the hand of GTE Company and personnel are of different character from different sources By correlating the two payments, the substance of the transactions would not change to give it the character of reimbursement Receipt taxable as ‘salary’ for personnel by virtue of employment with GTE Company. All such services rendered by Verizon India were exported to Verizon US. GTE Co has rendered managerial services to Indian Company Managerial services performed by the personnel as employees of GTE US and not that of Indian company Payment would be FTS under Indian Tax Law as well as FIS under tax treaty Existence and taxability of PE not addressed as amount taxable under FTS/FIS. 75

Indirect transfers

Indirect Transfers Vodafone Wins $2 bn Tax Case in Supreme Court
January 20, 2012 Finance Act India Imposes Tax on indirect transfer of Indian assets May, 2012 India makes retrospective changes to the law that would effectively reverse the decision of the Supreme Court in the Vodafone case Allows India to tax non-residents on gains arising from the disposal of share or interest if such share or interest derives its value “substantially” from Indian assets A validation clause has been introduced to legitimise recovery of tax on such indirect transfers (Clause 119 of the Finance Act) Withholding tax obligation to extend to all persons, resident or non-resident, irrespective of the presence of non-resident in India Supreme Court held that Indian Tax authorities have no basis to tax the sale of indirect interests held in the Indian Company Major Transactions impacted by such retrospective amendments Mitsui – Vedanta deal – Sale of 51% in Sesa Goa to Vedanta SABMiller’s acquisition of 100% stake in Fosters India Dampened Enthusiasm for International Investment in India Sanofi Aventis’ acquisition of majority stake in the Indian vaccine company Shanta Biotech Kraft – Cadbury takeover deal

The Vodafone Litigation :: The Transaction
HTIL (Cayman Islands) Vodafone (VIH B.V) Netherlands The Transaction SPA for sale of shares of CGP In February 2007, VIH B.V acquired 100% shares in CGP Holdings, Cayman Islands for USD 11.1 billion from HTIL HTI (BVI) Hldgs (BVI) International Holding Company CGP through various intermediate companies/contractual arrangements controlled 67% of HEL, India CGP (Cayman Islands) The acquisition resulted in VIH acquiring control of CGP and its downstream subsidiaries including HEL 3 GSPL (Mauritius) (Indirect) Mauritius Cos. (Indirect) HEL was a joint venture between Hutchinson Group & Essar Group Option to acquire 15.03% 51.96% HEL, India

The Vodafone Litigation :: Background
December 2008 Open offer made by Vodafone for HTIL’s stake in HEL VIH gave binding offer for acquiring entire shareholding in CGP VIH entered into SPA with HTIL through which VIH would own 42% direct interest in HEL. Through CGP it would own indirect interest in HEL In relation to the petition filed, the Bombay High Court held that the tax authorities had made out a prima facie case that the transaction was one of transfer of capital asset situated in India January 2009 In response to Writ filed with Supreme Court, the Supreme Court directed the tax to first determine the jurisdictional challenges raised by Vodafone It also permitted Vodafone to challenge the decision of the tax authorities on the preliminary issue of jurisdiction before the High Court September 2007 Notice was issued by the Tax Authorities to VIH for failure to withhold tax u/s 195 on payment made to HTIL indirectly Notice also included claim that VIH be treated as agent of HTIL u/s 163 September 2010 Bombay High Court dismissed petition of VIH Vodafone files appeal with Supreme Court Supreme Court directs Vodafone to discharge tax demand of INR.2500 crores 3 member bench led by Chief Justice of India pronounced order with majority in favor of Vodafone on 20th January 2012 October 2007 Writ Petition filed stating that the Tax Authorities do not have jurisdiction over sale of shares between two non-residents Claimed it to be Not-Taxable in India

The Vodafone Litigation :: Key Issues & SC Observations
Presently, indirect transfer of an asset in India is not Taxable under the Income Tax Act Key Issues SC Observations Whether any source of Income or Capital Asset said to be situated in India? Section 9(1)(i) of the Income Tax Act (“IT Act”) does not have ‘look through’ provisions, and it cannot be extended to cover indirect transfers of capital assets/ property situated in India The situs of the shares would be where the company is incorporated and where its shares can be transferred. A controlling interest is an incident of ownership of shares, which flows out of the holding of shares and hence is not an identifiable or distinct capital asset independent of the holding of shares Whether transfer of rights is incidental to a share transfer and only the situs of such shares should prevail? Whether Courts can lift the corporate veil in the absence of any look through provisions in the law or in the absence of a fraud? Interposing foreign holding / operating companies is a common practice. Before lifting corporate veil, transaction should be looked at in a holistic manner viz. time duration for which the holding structure exists, period of business operations in India etc Contd…..

The Vodafone Litigation :: Key Issues & SC Observations
Sole purpose of CGP was not only to hold shares in subsidiary companies but also to enable a smooth transition of business. Therefore, it could not be said that CGP had no business or commercial substance Whether the sale of CGP share can be said to be a transaction which was designed to avoid tax in India? Does section 195 have extra territorial jurisdiction? Applies only to payments made from a resident to a non-resident In the absence of LOB clause and presence of CBDT circular of 2000 and TRC, tax department cannot deny benefits of treaty to Mauritius Cos. TRC can be ignored if treaty is abused for the fraudulent purpose of tax evasion Whether India Mauritius treaty would be applicable where Vodafone had divested directly at Mauritius level? Supreme Court ruled that the transaction was structurally valid and the tax authorities in India had no jurisdiction to tax such an overseas transaction

‘Capital Asset’ to include management & control rights
Finance Act Rewrites Legislation Retrospectively :: Taxing Indirect Transfer of Indian Assets Non-residents are liable to tax on indirect transfers of Indian assets, including transfers of shares in companies which derive their value “substantially from assets located in India”, and covering transfers back to 1 April Key Amendments Key Impact ‘Capital Asset’ to include management & control rights Transfer of shares (at any level) which result in transfer of controlling interest of an Indian Company could give rise to a taxable event in India ‘Transfer’ to include parting with or creation of right, notwithstanding that such transfer flows from transfer of shares of an offshore entity Transfer would now include indirect transfer of shares if rights in such shares are effected and dependent upon transfer of shares even of a foreign company Widens the scope of taxation of income under Section 9 of the ITA and bring into tax net, the gains derived from transfer of share or interest if such share or interest derives either directly or indirectly its value substantially from assets located in India Scope of term ‘through’ clarified to include ‘by means of’, ‘in consequence of’, or ‘by reason of’ Scope of Section 9(1)(i) Explanation 5 has been inserted to Section 9(1)(i) of the IT Act to clarify that an asset or a capital asset being any share or interest in an entity incorporated/located outside India, shall be deemed to have always been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India. CAPITAL ASSET [Section 2(14)] An explanation has been inserted in Section 2(14) of the IT Act to clarify that the term “property” shall be deemed to have always included any rights, in or in relation to an Indian Company, thereby expanding the scope of the term ‘capital asset’ TRANSFER [Section 2(47)] An explanation has been inserted in Section 2(47) of the IT Act to clarify that the term “transfer” shall be deemed to have always included disposing of or parting with an asset or any interest therein, or creating any interest in any asset in any manner whatsoever, directly or indirectly, notwithstanding that such transfer of rights has been characterized as being effected or dependent upon or flowing from the transfer of a share or shares of a company registered or incorporated outside India. The term “THROUGH” [expln 4 of Section 9(1)(i)] Explanation 4 has been inserted to Section 9(1)(i) of the IT Act to clarify that the term “through” shall be deemed to have always meant and included “by means of”, “in consequence of”, or “by reason of”. Section 195 An explanation has been added to Section 195 of the IT Act, to clarify that the obligation under Section 195(1) to make deduction shall be deemed to have always extended to all persons, resident or non-resident, irrespective of the presence of the non-resident, in India. Witholding tax provisions applicable to non-residents irrespective of residence/ place of business/ connection in India The amendment widens the withholding tax provisions of Section 195 of the ITA by applying it to all persons whether resident or non- resident

Retrospective Amendment applicable from 1962
Finance Act Rewrites Legislation Retrospectively :: Taxing Indirect Transfer of Indian Assets Key Amendments Key Impact Retrospective Amendment applicable from 1962 Despite the fact that the law is amended retrospectively from 1961, the Revenue authorities can go back only 7 years to initiate proceedings against a company. In other words, only transactions from 1 April 2005 will be open to scrutiny after 31 March 2012, unless proceedings have already been initiated in the past. Tax authorities allowed to issue notice to examine the taxability in India, of income arising in respect of “Financial interest in an entity” located outside India for an extended period of sixteen years This amendment could enable the tax authorities to reopen cases for the aforesaid extended period. Clarification Provided by CBDT The Central Board of Direct Taxes (“CBDT”) has issued clarification with regards to the reopening of completed assessments on account of clarificatory amendments introduced by the Finance Act 2012 viz. Section 2(14), Section 2(47), Section 9 and Section 195 with retrospective effect The Board has directed that in case where assessment proceedings have been completed under section 143(3) of the Act, before 1st April 2012, and no notice for reassessment has been issued prior to that date, then such cases shall not be reopened under section 147/148 of the Income Tax Act on account of the abovementioned clarificatory amendments introduced by the Finance Act, 2012`

Finance Act Rewrites Legislation Retrospectively :: Taxing Indirect Transfer of Indian Assets
Clarifications Required…… No threshold defined to determine what constitutes “substantial” with regards to taxing offshore transfers with substantial asset base in India Computation mechanism not prescribed Taxability based on the proportion of the value of the India business to the global value Whether gross or net value of India assets to be considered? Applicability of Treaty provisions?

International Trends

Taxing Indirect Transfers
International Trends PERU US SOUTH KOREA AUSTRALIA CHINA Taxing Indirect Transfers China modified its tax code to tax “Indirect Transfers” of local companies and assets....(2008) A non-resident entity that transfers shares of another non-resident entity that holds an interest in Chinese companies may become subject to Chinese capital gains tax if the latter non-resident entity is deemed to have engaged in a transaction involving an abuse of organizational form and having no business purpose Under the guidance, a non-resident transferor is required to make a tax filing to the Chinese tax authority to disclose certain required information, within 30 days of signing an equity transfer agreement The Chinese tax authority will review the disclosed information and determine whether the transferred non-resident entity could be disregarded for tax purposes in order to tax the capital gain of the non-resident transferor Chinese Tax authorities received $25 mn capital gains tax payment resulting from an indirect stock transfer, in 2010…. Indonesia, Mexico etc….

GAAR Provisions

GAAR – Basic Provisions
Main purpose or one of the main purposes is to obtain a tax benefit AND Not at arm’s-length Misuse/abuse of tax provisions Lacks commercial substance Not for bona-fide purposes OR OR OR Impermissible Avoidance Arrangement (IAA) Consequences Disregard / combine / re-characterize whole / part of the arrangement Disregard corporate structure Deny treaty benefit Re-assign place of residence / situs of assets or transaction Re-allocate income, expenses, relief, etc. Re- characterize Equity- Debt, Income, Expenses, relief, etc.

Acquisition Tax Issues

Modes of Acquisition Acquisition Business Purchase Share Purchase
Slump Sale Itemized Sale

Acquisition through the Slump Sale route
Meaning Slump sale means the transfer of one or more undertakings as a result of the sale for a lump sum consideration without values being assigned to the individual assets and liabilities in such sales. Tests to Satisfy Business sold as a whole on a going concern Documents not to indicate item-wise value of the assets transferred Others Consideration - can be discharged by issue of shares / payment of cash Consideration is received by company which is transferring the undertaking and not its shareholders Can be achieved through shareholder resolution and a business transfer agreement Special provisions for computation of capital gains in case of slump sale – Section 50B No Indexation benefit for undertaking

Computation Mechanism ~ Capital Gains Capital gains = Slump Price – Networth of the transferred undertaking Computation Mechanism ~ Net Worth Networth of the Undertaking = Tax WDV of depreciable assets + Book value of other assets – Book value of liabilities Revaluation of assets to be ignored while calculating networth

A Pvt. Ltd. Undertaking What will constitute as an undertaking? Consideration Whether lump sum consideration is to be discharged in cash or shares can be issued? If networth of the undertaking transferred is negative Whether to be considered as zero? Carry forward of losses Whether the losses pertaining to the undertaking can be transferred? Section 50B v/s Section 50C Whether the provisions of Section 50C would be attracted in case of land being the only asset in the undertaking proposed to be transferred? Business A Business B Slump sale B Pvt. Ltd.

Acquisition through Itemised Sale
Meaning Sale of assets & liabilities with values assigned separately for each item of assets and liabilities Tax Implications Depreciable assets - as per provisions of Section 50 (Short Term Capital Gains) Capital assets - as per provisions of Section 45 read with Section 48 Current assets - Business profits Others Benefit of indexation would depend on the character of the asset. Brought forward losses & unabsorbed depreciation related to the undertaking not transferred Cost of acquisition to the Purchaser - consideration paid for each asset

Acquisition through Share Purchase
Seller Perspective Acquirer Nature of share Long Term Capital Asset (>12 months) Short Term Capital Asset Equity share of a listed company subject to STT Exempt 15.45% Equity Shares of a listed company without payment of STT 20.6%(with indexation) 30.9% Any other shares Consideration shares Target *Surcharge as applicable Buyers Perspective Price paid for shares would be the buyers cost of acquisition of shares Preservation of tax losses - In case of unlisted companies, the change in shareholding cannot be in excess of 49% vis-à-vis the shareholding in the year in which the losses were incurred, in order to protect carry-forward benefits

Other Modes of Acquisition
Merger Demerger

Acquisition through the merger route
Meaning Merger of one or more companies into another Merger of two or more companies to form a new company Prescribed Conditions Transfer of all properties and liabilities Allotment of shares to shareholders holding not less than 3/4th in value of the shares in the amalgamating company (other than the shares already held by the amalgamating company or nominees for the amalgamated company or subsidiary) Cost of Acquisition & period of holding Cost of acquisition = cost of acquisition of shares in amalgamating company Period of holding = Period of holding of shares in amalgamating company to be counted

Depreciation In the hands of amalgamating company - Depreciation in year of transfer – available on pro-rata basis In the hands of amalgamated company - the basis of tax written down value in the hands of amalgamating company Implications No capital gain on transfer of capital assets both in the hands of amalgamating company and its shareholders Expenses incurred on amalgamation are tax deductible Losses of amalgamating company available to the amalgamated company subject to compliance with conditions of Section 72A of Income tax Act (“ITA‟)

Loss of Rs. 10 cr Mat Credit ~ Rs. 10 cr A Pvt. Ltd. A Pvt. Ltd. A Pvt. Ltd. Tax holiday under S. 80IA Merger 100% Merger Merger B Pvt. Ltd. B Pvt. Ltd. B Pvt. Ltd. Merger of B Ltd. Into its holding company A Ltd. No issue of shares on merger Whether qualifies the test on s. 2(1B) Merger of A Ltd. Into B Ltd. Carry forward of losses ~ s. 72A vs. s.79 – Which section to apply? Merger of A Ltd. Into B Ltd. Whether B Ltd. can utilise MAT credit of A Ltd.? Continuity of Tax holiday? Impossibility of performance of conditions

Acquisition through the De-merger route
Meaning Demerger involves transfer of identified business from one company to another and in consideration, the company which acquires the business issues shares to shareholders of the selling company Prescribed Conditions Transfer of all properties and liabilities at book values Discharge of consideration by issue of shares on proportionate basis Allotment of shares to shareholders holding not less than 3/4th in value of the shares in the demerged company (other than the shares already held by therein) Transfer to be on going concern basis Cost of Acquisition & period of holding Cost of shares in resulting company = (Cost of shares in demerged company)* (net book value of assets transferred / Net worth of demerged company prior to demerger) Cost of shares of demerged company = Original cost - Cost attributable to shares of Resulting Co. Period of holding = Period of holding of shares in demerged company to be counted

Depreciation Depreciation allowable in the ratio of the actual number of days Cost of acquisition and Written Down Value (WDV) of depreciable assets Actual cost = Cost to the demerged company. Block of assets (for resulting company) = WDV of the transferred assets as appearing in the books of account of the demerged company immediately before the demerger Block of assets (for demerged company) = WDV of the block as on the date of transfer minus the WDV of the assets demerged into the resulting co. Losses Losses - Available to the resulting company Directly relatable to undertaking being transferred Not directly relatable –proportionate to the assets transferred

Undertaking What will constitute as an undertaking? Can single “investment‟ constitute undertaking? Whether the residual business i.e. the assets and liabilities remaining with the demerged company ought to be an undertaking? Discharge of consideration Can the resulting company issue preference shares as consideration for demerger? Continuity of benefits of tax holiday Whether the tax benefits availed by A Ltd. in respect of the undertaking being demerged can also be availed by B Ltd. on demerger? Carry forward and set off of losses Whether the demerged undertaking to be an industrial undertaking? A Pvt. Ltd. (Demerged Co.) Business A Business B Demerger B Pvt. Ltd. (Resulting Co.)

Outbound Investment

Key Questions while going outbound
How can I reduce the effective tax rate How do I reduce burden arising from repatriation of funds How much can I invest overseas What are the regulations in the host country How to optimize exit Should the IP be migrated to a tax efficient jurisdiction What should be my global tax structuring approach Where should I source acquisition finance from

Key objectives Maximising shareholder value
Minimising global tax costs Ease in intra-group funds flow IPO considerations Alignment with investor objectives - strategic or financial investors Compliance with regulatory framework

Global Transfer Pricing
Some Deciding factors Foreign Country Risks Exit Tax Planning Complex tax environment in U.S./ Europe Foreign Exchange regulations Mode of investing Entity structuring Structuring International acquisition International holding purposes Post acquisition structuring Key Considerations Global Transfer Pricing India Considerations Increase in inter company transactions as Indian company acquire foreign companies TP documentation requirement Multi jurisdiction documentation compliance required India regulatory aspect Achieving tax efficient circulation of cash within foreign structure Repatriation planning for mitigating India tax cost Foreign tax credit issues

Tax – Pivot to business decisions !
The ‘tax’ effect 33.99 percent Appropriate Acquisition Structure Intermediate Holding Company Choice of Jurisdiction Funding Options Transfer Pricing IP Holding Company Overall effective tax rate of Global Business Tax – Pivot to business decisions !

Modes of investing overseas Unincorporated Incorporated Branch Liaison Office Company WOS JV Joint venture company (JVC) Greenfield or Acquisition

Choice of Entity Structures Hybrid Branch Legal Losses can be consolidated but inability to defer India tax Income attribution issues Can combine benefits of corporate form with flexibility of partnerships Taxation in India deferred until repatriation Economic double taxation on repatriation

Limited Liability Companies (LLC) Limited Liability Partnership
Forms of business presence – a brief comparison Branch Office Generally gives rise to taxable presence in foreign country Double Taxation Avoidance Agreement (DTAA) to determine the existence of Permanent Establishment (PE) in foreign country Losses can be consolidated but inability to defer India tax Income attribution issues Corporation Taxed in accordance with domestic laws of the country of incorporations Some countries prescribe different tax rates for Global business companies Partnership Taxability of partnership firm under the domestic tax laws vis-à-vis taxability of partner share Limited Liability Companies (LLC) Entitled to same tax and limited liability benefits as a Corporation Trust Taxability of trust varies according to the governing domestic tax laws Generally, income of trust bears tax in the hands trustees Limited Liability Partnership Treated as a normal partnership for tax purposes. Taxability of partnership firm vis-à-vis partner share

Case Study – Forms of business presence
Taxability of a Company Taxability of a Branch Indian Company UAE IHC India Outside India Turkey Qatar Oman Kuwait Bahrain Saudi Iraq Iran Tax Rate- 10% Dividend – Nil Interest – 7% Tax Rate- 15% Interest – Nil Tax Rate- 20% Dividend – 5% Interest – 5% Tax Rate- 25% Dividend – 10%* Interest – 10% Tax Rate- 12% Tax Rate- Nil Interest – 15% UAE to set up company in the Targets Branch profit- 5% Branch profit- 15% UAE to set up a branch in Targets

Use of IHC

Direct Investment from India into Target Co.
 Subsidiary India Target country Direct Investments Indian Company Direct Investment leads to immediate taxation No flexibility to time dividend/interest and capital gains to be received back in India Increased tax burden if Target in high tax jurisdiction Limited capacity to borrow Borrowing’s Interest to effect EPS/market capitalization of Indian Co.

Harnessing the benefits of an IHC
Indian Company  Flexibility to up-stream returns Possibility of reducing withholdings on paybacks Minimise tax incidence on exit Deduction of funding costs at IHC level Enhanced ability to leverage on group strength Minimise overall group tax rate India Investment  International Holding Company Jurisdiction of intermediate company Target country Investment  Subsidiary

Provisions of DTC

New regulations POEM CFC General Anti-Avoidance Rules (“GAAR’)
Direct Tax Code Wide sweeping in nature - Encompass all kinds of schemes, structures, transactions that could be used to avoid taxes Guidelines on GAAR notified – covers all transactions post August 2010 with certain exceptions prescribed Controlled Foreign Corporations (‘CFC’) Income of Holding Company taxed in India without actual distribution where Holding Company qualifies as a CFC under the proposed DTC CFC POEM Place of Effective Management (‘POEM’) Taxability of the worldwide income of foreign company where the POEM is demonstrated in India 117

Imperative to evaluate impact of CFC on outbound structure
Introduction of CFC provisions Report of Working Group on Non- Resident Taxation (2003) recommended enacting of CFC provisions CFC provisions were not part of original DTC 2009 Introduction of CFC provisions hinted in RDP in June, 2010 CFC provisions introduced in Twentieth Schedule in DTC 2010 Income attributable to a CFC proposed to be taxed in the hands of the resident tax payer Actual subsequent distribution by CFC not to be taxed in the hands of the resident tax payer Equity / preference shares held in a CFC liable to Wealth-tax Residency test for foreign companies Residency test for foreign companies based on Place of Effective Management (POEM) Income of foreign company with POEM in India will be taxable in India Dividends declared by such foreign company will be liable to DDT in India Imperative to evaluate impact of CFC on outbound structure

CFC tests Indian Company Conditions for qualifying as CFC Control Direct or indirect control by Indian residents, i.e. 50% or more voting power, or Application of 50% or more of income or asset for its benefit or dominant influence in decisive in shareholders meeting. Low tax territory: Taxes paid in a Foreign country < 50% of taxes payable in India. Residency: Based on place of effective management/ location of assets. India Outside India Trading cum Holding Company CFC Passive Income - Dividend, Interest, Royalty, sale to related parties Exemption Turkey Qatar Oman Quwait Bahrain Saudi Iraq Iran “Specified income” of CFC - Rs.25 lakhs or below; or CFC engaged in active trade/business and passive & other related party income < 50%; or CFC is listed on a stock exchange in the country of residence. Profits of Trading cum Holding Company taxed in hands of the Indian parent without actual distribution if the qualified as a CFC

Computation mechanism
A – “Specified Income” of CFC B - Higher of % of value of capital % of voting shares or interest C – No of days voting shares / capital / interest held by resident in CFC D – No of days Foreign Co was a CFC Income attributable to CFC = A * B * C 100 D M – Net Profit as per P&L A/c (as per IFRS / GAAP / IAS / As notified under Cos Act) N - Prov for unascertained liab / diminution in value of assets O – Interim Dividends paid P – Losses of Prior years Q – No of days Foreign Co was a CFC R - No of days in accounting period “Specified income” = (M+N–O–P) * Q / R of CFC CFC to impact overseas investments / intra-group supply chain arrangements Computation mechanism encompasses “Active” as well as “Passive” income !!

Case Study – Computation of Passive Income
Illustrative projections Amount in Rs. Crores Note: Sales to related parties is counted as Passive income Interest/ Dividend etc is accounted for as Passive income Test requires that Passive income should be <50% of Total income In FY 14, as the passive income > 50% of Total income , the income of the overseas Trading cum Holding Company would be taxed in the hands of the Indian parent. Important to establish active income test for qualifying for CFC exemption

Trading cum Holding Company
POEM DTC 2010 proposes to tax the worldwide income of foreign company where the Place of Effective Management (‘POEM’) is demonstrated in India Residency Rule: A company is resident in India if its “place of effective management, at any time in the year, is in India Definition: the place where the board of directors of the company or its executive directors, as the case may be, make their decisions; or in a case where the board of directors routinely approve the commercial and strategic decisions made by the executive directors or officers of the company, the place where such executive directors or officers of the company perform their functions Indian Company Income earned by the Trading cum Holding company to be taxed India Outside India Trading cum Holding Company Imperative to hold Board meetings, have local directors, make business decisions in Trading Company Impact / Issues Turkey Qatar Oman Quwait Bahrain Saudi Iraq Iran Expression ‘at any time’ very wide. Meaning of the expressions ‘routinely’ / ‘commercial and strategic decisions’?

I Co. holding F Co. through IHC
Case Study – Use of SPVs (Controlled Foreign Company) I Co. I Co. holding F Co. through IHC Use of SPV/ IHC designed to delay/avoid Indian taxes on the dividend income to be received from F Co. India Overseas Intermediate Holding Company (IHC) F Co. CFC like taxation of the income of IHC in India- Invoking the GAAR provisions on deferral of income?

Deputation issues – Outbound

Why secondment Companies seeking to do business in world markets - can be successful by having its appropriate talent placed globally Sending employees overseas is a great talent management / retention tool Number of outbound assignees - increased considerably, mainly fuelled by growth in IT outsourcing Large number of outbound employees - junior management and technology personnel Major outbound population – IT, Healthcare, Banking, Retail, etc.

Tax considerations Country-wise evaluation of Permanent Establishment (“PE”) exposure for Indian company resulting from presence of its personnel in various locations Examination of availability of “tax credit” in India on foreign taxes Evaluation of contracting model for assignment of personnel to mitigate PE exposure Transfer pricing legislation Compliance with tax filing requirements by Indian company based on foreign tax laws

Employer – Employee HOME COUNTRY HOST COUNTRY Departure formalities
Residential status Tax filings Reporting overseas income Tax credit on overseas income Tax Refunds Host Country tax registration Tax filings Reporting of Indian income Employment income Bonus Stock options Other income Tax credit

Case Study- Global E-Business Operations
Overseas Company Facts Under a Secondment Agreement, ABC Company seconded its employees to the Overseas Company ABC Co. shall pay remuneration to the seconded employees and the Overseas Company shall reimburse ABC Co to the extent of salaries paid to the seconded employees Issues for ABC Company Taxability of the payment received from Overseas Company? Services to the Overseas Company Reimbursement by Overseas Company of the remuneration paid by ABC Co Seconded Employees Overseas India Employees seconded to Overseas – Remuneration paid by ABC Co. ABC Company

Questions?

Questions & Answers Answers & Questions

Thanks

Agenda 1 Setting the context 2 Key Challenges

Similar presentations

Presentation on theme: "Agenda 1 Setting the context 2 Key Challenges"— Presentation transcript:

Similar presentations

About project

Feedback

Log in

Auth with social network:

Agenda 1 Setting the context 2 Key Challenges

Similar presentations

Presentation on theme: "Agenda 1 Setting the context 2 Key Challenges"— Presentation transcript:

Similar presentations

About project

Feedback