Presentation on theme: "Agenda 1 Setting the context 2 Key Challenges"— Presentation transcript:
0 Presentation on tax issues – Inbound & Outbound December, 2013 MITSUI – Vedanta DealIn 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 CourtSAB MILLER DEALIn 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 CourtSANOFI AVENTISSimilarly, 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 CourtKRAFT-CADBURYIn 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.
1 Agenda 1 Setting the context 2 Key Challenges 3Key Considerations for inbound investments4Forms of business presence for foreign companiesMITSUI – Vedanta DealIn 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 CourtSAB MILLER DEALIn 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 CourtSANOFI AVENTISSimilarly, 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 CourtKRAFT-CADBURYIn 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.5Capital structuring6Cross border tax issues
2 Agenda…. (Contd.) 7 Indirect transfer of shares 8 Acquisition tax issuesKey considerations for outbound investments910Forms of business presence overseasMITSUI – Vedanta DealIn 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 CourtSAB MILLER DEALIn 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 CourtSANOFI AVENTISSimilarly, 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 CourtKRAFT-CADBURYIn 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.11Use of International holding company12Proposed Direct Tax Code - Impact on outbound investments
4 Setting the Context… the Indian tax climate Introduction of GAAR provisions – substance over formTax on indirect transfer – ambiguity in provisionsRetrospective amendments – uncertainty on investment structureTransfer pricing legislations/ litigations – impact on structuresProposed CFC Regulations – planning future investments?Eligibility to Treaty benefits and unilateral treaty overrideDynamic and evolving tax environment to impact present and future investment cycle
6 Key ChallengesEffective tax rate of 33.99% for domestic companies and 43.26% for foreign companiesAdditionally 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 benefitsCapital structuring Vs. tax impact of returnsWithholding tax obligations in India on interest, royalties, fee for technical services, requirement of obtaining a PAN in IndiaTax incentives available under the domestic tax regime
7 Key ChallengesAcquisition tax issues where presence is via inorganic routeExit taxes on share 20% Vs. 30%Tax laws in the home country of the investor relating to outbound investments viz. CFC, tax creditsRetrospective amendments impacting established structuresRising litigation and uncertain tax positionsAmbiguity surrounding new laws and lack of well defined rules
9 Key considerations Factors impacting decision making Economic PoliticalCulturalLegalFinancialTechnologySystemStabilityPhilosophyRiskSocialEthicsReligionDiversityResourcesPurchasingpowerExchangeratesDemographicsCorporateLawsRegulationsTax LawsJudiciaryFundavailabilityInvestor valueBankingGrowth rateSavingsCapital formationLabour LawsEnvironmentFactors impacting decision making
10 Inbound investment life cycle GettingStartedStructuringRepatriationExitGroomingEntry StrategyAppropriate jurisdiction planningEligibility to claim tax treaty benefitsAvailable Entry Routes – FDI, FII, FVCITime FrameRegulatory OutlookDeal pricingAdherence to prescribed benchmark price/ floor priceTax efficiencyAvailability of business losses and unabsorbed depreciationInstruments/ Modes of funding – Equity, Convertibles, Debt, Warrants, FCEBs, FCCBsCommercial objectivesModes of RepatriationPeriodic/ steady cash flows – Dividends, InterestPeriodic/ selective buy-backGrowth capital with bullet payment at the end of the investment horizonPlanning tax efficiencyTimingIncome characterization – a critical determinantExit optionsFloatationBuy-backSecondary market/ trade salePricingPlanning tax efficiencyRegulatory implications
11 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 CapitalWhether to invest directly or through an Intermediate Holding Company (‘IHC’)Structure the tax considerations effectively during the lifecycle of the India investmentRepatriation and exit strategies
12 Key Challenges Maximising shareholder value Minimising global tax costsAlignment with investor objectivesEase in intra-group funds flowConsiderations for fundraisingDetermination of efficient intermediate jurisdictions for positioning of SPVsCompliance with tax, regulatory and legal framework in India and in the relevant host country
14 Forms of business presence Entity optionsWholly owned subsidiaryJoint VentureBranch Office / Project OfficeLiaison OfficeOther OptionsTechnology Transfer & Licensing AgreementServices Agreement
15 Forms of business presence Unincorporated entitiesIncorporated entitiesParticularsLiaison OfficeProject OfficeBranch OfficeWholly owned subsidiary/ Joint VentureActivitiesRepresentation/ communication onlyExecution of specific projectsSpecified permissible activitiesAutomatic/ prior approval routeTaxationGenerally a non-taxable presence43.26%33.99% plus DDT %Limited Liability Partnership Act, 2008 enacted in 2009LLPs combine limited liability of companies and flexibility of partnershipsFDI in LLP permitted subject to prior FIPB Approval
16 Wholly owned subsidiary/ Joint Venture Forms of business presence – a comparisonParticularsLiaison OfficeProject OfficeBranch OfficeWholly owned subsidiary/ Joint VenturePurposeLiaison activities i.e. it acts as a channel of communicationExecuting a project in IndiaPermitted RBI activities - export, import, consultancy research etc.Permitted to carry out wide number of activities subject to FDI guidelinesLegal formExtension of the ParentSeparate legal entityTaxable presenceDoes not per se result in taxable presenceTaxed as an independent legal entityTax ratesNA - Purpose is not income earningRates applicable to Foreign companyExit taxesNA - since not permitted to carry out any income generating activitiesRequired to file tax clearance certificateNo requirement of filing tax clearance certificate as tax arrears are recovered on winding up
17 Ideal form of business presence? – Establishment of Liaison Office Case Study 1 – Form of business presenceF Co. (UK)F Co. is an exporter of finished goods. Contracts executed in home countryExports finished goodsRequires temporary space for executing marketing activities in exporting countriesIndiaChinaSri LankaIdeal form of business presence? – Establishment of Liaison Office
19 Funding instrumentsEquity Shares – same class or different classes of sharesACompulsorily Convertible Preference Shares (‘CCPS’)BCompulsorily Convertible Debentures (‘CCDs’)CExternal Commercial Borrowings (‘ECB’)DBased 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
21 Funding instruments Equity Instruments Debt Instruments Equity SharesCompulsorily Convertible Preference Shares (‘CCPS’)Compulsorily Fully Convertible Debentures (‘FCD’)External Commercial Borrowings (‘ECB’)Withdrawal of fundsGenerally not possible during company’s lifespanCannot be redeemed prior to conversionCannot be redeemed prior to conversionMinimum average maturity period prescribedGenerally permitted for capex purposes in real/ industrial/ infrastructure sector. Not permitted for working capital etc.End-use restrictionsNoneNoneNone
22 Funding instruments - Comparison ParametersEquityCCPSCCD(Quasi-debt)ECBNature of instrumentEssentially considered as a part of Share CapitalA debt instrument with a right to convert into EquityDebt instrumentNature of returnDividend exempt for shareholdersDividend received if any will be exempt in the hands of investors (Shareholders)Interest received if any till conversion would be taxableDividend received post conversion to equity will have same treatment as for an equity instrumentInterest received be taxableDeductibility of cost of raising capitalNon tax deductibleInterest allowed as deduction (arm’s length- as per transfer pricing principle)Dividend not deductibleInterest allowed as deduction (arm’s length- as per transfer pricing principle)
23 Funding instruments Parameters Equity CCPS CCD (Quasi-debt) ECB Tax rateDDT % by distributing company on the amount of dividendsNot taxable in the hands of shareholdersSame as for equityInterest – as per treaty ratesDividend post conversion - same as equityInterest – as per treaty rates or 10%DeductibilityDividends and DDT not deductibleSame as equityInterest tax deductibleTax implication in the hands of shareholder at the time of repayment of capitalBuyback – results in distribution tax of 22.66% on the company; Exemption to shareholderCapital reduction – deemed dividend tax to extent of profits and balance taxed as capital gains for shareholderCapital Gains tax liability at the time of redemption in the hands of shareholdersNo DDT at the time of redemption if redeemed at issue pricePost conversion to equity – same as for equityNo tax implications on repayment
24 F Co. to infuse funds in form of CCDs in I Co. Case Study 2 – Funding through Convertible DebenturesF 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 scrutinyInterest paid on CCDsInfusion of funds through CCDsOverseasIndiaI Co.Denial of interest benefit to I Co. on re-characterization of debt to equity ?
26 Repatriation strategies Various modes of cash repatriation to Parent CompanyDividend distribution1Share transfer4Royalty/ Fee for Technical Services2Buy back of shares5Interest3Capital reduction6Imperative to evaluate the tax implications under respective treaties
27 Cash repatriation1234Dividend DistributionBuy BackCapital ReductionPurchase of asset from overseas companyDDT applicable @ %Tax applicable on the company distributing such dividendTax 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 ratesRequires sanction of the High CourtCould 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
28 Cash repatriationTraditionally, MNCs have used shares buyback as a profit repatriation toolWindow of tax free repatriation on “Buyback” closed on account of introduction of Tax on Share Buyback under section 115QA of the Income Tax ActTax to be levied with effect from , on share buyback undertaken in accordance with the provisions of section 77A of the Companies Act, 1956Tax 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 issueIndian Company shall be liable to pay tax on the income distributed by way of Buy Back; No tax in the hands of the shareholder
29 Case Study 3 – Buyback of shares from a treaty country F Co.IHC to buyback its shares from I Co.OverseasIHC can claim the benefit of the applicable tax treatyIntermediate Holding Company (IHC)As per applicable tax treaty(favorable tax jurisdiction),capital gain may not be taxable in IndiaBuyback of sharesFavorable tax jurisdictionHowever capital gain will be taxable in India in case of buyback of shares from a non treaty countryIndiaI Co.Distribution tax applicable on buyback – Finance Act 2013
30 Case study 4 – Inbound lifecycle TransactionCompany headquartered in UK with global operations wants to enter into India in the logistics space with an Indian Joint venture partnerObjectivesWhat 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 JVStructure the flow-back of returns in a tax efficient manner
31 Case study 4 – Inbound lifecycle Step 1 – Deciding the form of presence to be established in IndiaUK Co.UK Co.OverseasOverseasIndiaJV PartnerIndiaJV PartnerIndian Co.LLPSetting up a presence in the form of a subsidiarySetting up a presence in the form of a LLP, which would be subject to approvals
32 Case study 4 – Inbound lifecycle Step 2 – Funding the Indian Co. viz. capital structureDeciding the capital structure (%) between the Foreign and Indian partner – Equity Vs. ConvertibleReturns expected – Dividend Vs. InterestDeductibility for Indian Co.Transfer pricing the interest paymentsStructuring further funding requirements and Target shareholding between partnersValuations on exit - FDI Vs. TaxMax is DCFMin is BNWUK Co.OverseasIndiaJV Partnery%X%Indian Co.
33 UK directly investing into Indian Co. UK investing via Singapore Case study 4 – Inbound lifecycleStep 3 – Deciding the need for an intermediate jurisdictionUK Co.UK Co.OverseasSingaporeIndiaOverseasIndiaIndian Co.Indian Co.UK directly investing into Indian Co.UK investing via Singapore
34 Case study 4 – Inbound lifecycle India - UK Vs. India -SingaporeWithholding rates for revenue streams – Dividend, Royalty/ FTS, InterestTreatyCGTRoyalty/ FTSInterestSingaporeOnly in Singapore10%10%-15%UKBoth states10%-20%Taxability under local lawsCorporate tax rates – 17% Vs. 23%Evaluate exemption for foreign dividendsWHT on dividends paid further – no WHT in SingaporeEvaluate CFC laws for parent company
35 Stake sale by UK Vs. buy back Stake sale by Singapore Vs. buy back Case study 4 – Inbound lifecycleStep 4– Repatriation and exit taxesUK Co.UK Co.OverseasSingaporeIndiaOverseasIndiaIndian Co.Indian Co.Stake sale by UK Vs. buy backStake sale by Singapore Vs. buy back
36 Case study 5 – Inbound presence via Acquisition Transaction – Acquisition of shares Vs. businessAcquirer purchases shares from existing shareholdersConsideration flows directly to shareholderShareholderIndian companyAcquirerSharesTransfer of sharesConsideration
37 Case study 5 – Inbound presence via Acquisition Acquirer perspectiveAccumulated tax losses, if any, may be lost consequent to change in shareholdingIn case of listed company, Takeover Code provisions could be attracted, depending on percentage stake being acquiredSeller perspectiveCapital gains = Sale consideration – cost of acquisition (inflation shelter available where holding period exceeds 12 months)Transaction costStamp duty at 0.25% of total consideration; exemption for dematerialised shares
38 Transfer of business under slump sale Case study 5 – Inbound presence via AcquisitionTransaction – Acquisition of shares Vs. businessAcquirer incorporates a new Indian company and infuses equityThe New company acquires the business from the seller company (going concern basis)Alternately, one could acquire assets and liabilitiesShareholderIndian companyAcquirerNew CompanyTransfer of business under slump saleConsideration
39 Case study 5 – Inbound presence via Acquisition Acquirer perspectiveDepreciation to be claimed on the basis of valuationAccumulated tax losses, if any, will not be available for acquirer; continue in Indian CompanySeller perspectiveCapital gains = Sale consideration – net worth of businessTransaction costsSales tax may not be payable on sale of business as going concernStamp duty on consideration subject to evaluation
40 Transfer of assets & liabilities Case study 5 – Inbound presence via AcquisitionTransaction – Acquisition of shares Vs. businessInstead of acquiring the operations (lock, stock and barrel), the acquirer purchases specific assets/ liabilitiesShareholderIndian companyAcquirerNew CompanyTransfer of assets & liabilitiesConsideration
41 Case study 5 – Inbound presence via Acquisition Acquirer perspectiveDepreciation claimed on the basis of consideration allocated to assetsAccumulated tax losses, if any, will not be available for acquirer; continue in Indian CompanySeller perspectiveTaxed as business income Vs. capital gain depending on nature of assetTransaction costsSales tax could be leviedStamp duty on consideration subject to evaluation
42 Case study 5 – Inbound presence via Acquisition SharesBusinessAssetsStep-up of depreciationNoYesAvailability of benefit of tax lossesConditionalNo – continues in Seller coSales TaxStamp dutyYes – on sharesYes – subject to evaluationYes - subject to evaluation1 Open to dispute2 Based on type of entity and extent of acquisition
44 Exit taxes – Capital gains Income Characterisation Key ChallengesExit taxes – Capital gainsIncome CharacterisationDeputation issuesWithholding taxTaxable presence - PECross border tax
45 Tax treaty networkWhat 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 articleCheck for Protocols / Technical Explanations / MoUIs there an MFN Article? If yes, are there beneficial provisions in qualifying later treaties that can be applied?
46 Capital gains – sale of shares What investors look forCountryCapital gains – sale of sharesRoyaltyFTSInterestSingaporeAlienator State10%10%/15%Mauritius15%No articleRate not prescribedUKTaxable in both States15%-20%0%-15%NetherlandsTaxable in both States on transfer of 10% or more shares to residentTaxable in Alienator State in case of corporate reorganization (Subject to holding of at least 10%)Luxembourg
47 Royalty & FTS DTAA need not be applied No Opt for DTAA if more beneficialTaxable under the Act?Taxable under DTAAOpt for Act if more beneficialAnalyze DTAAYesNot taxable under DTAA
48 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 incomeContract entered before May 31, 1997Contract entered on or after May 31, 1997 but before June 1, 2005Contract entered on or after June 1, 2005New rate pursuant to amendment by Finance Act, 2013Royalty30%20%10%25%FTSNote: All rates are exclusive of applicable surcharge and education cess
49 Royalty & FTS Resident State Source State PE in source state Primary right to tax with the country of residenceSource StateMost treaties provide the country of source to levy tax up to a maximum level on a gross basisPE in source stateWhere 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)
50 Right of the states to tax Royalty & FTSRight of the states to taxRoyalties 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.
51 Article 12 - Royalties and fees for technical services Royalty & FTSArticle 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 broadcastingany patent, trade mark, design or model, plan, secret formula or processor for the use of, or the right to use, industrial, commercial, or scientific equipment, or for information concerning industrial, commercial or scientific experienceTerm ‘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)
52 Act or DTAA whichever is more beneficial Royalty & FTSAct or DTAA whichever is more beneficialRate ArbitrageRates under the respective DTAA may be lower than the rates under the ActDefinition arbitrageDefinition under the DTAA may be narrower than the definition under the Act
53 40% on net basis, if PE exists 40% on net basis, if PE exists Royalty & FTSRate ArbitrageIncome Tax ActDTAA40% on net basis, if PE exists40% on net basis, if PE existsRate as applicable25% on gross basis
54 Royalty & FTS Definition Arbitrage Income Tax Act DTAA Transfer of all rightsOnly use of or right to use is coveredPatent, invention, model, design, secret formula, or process or trade mark or similar propertyor similar property is not usedCopyright or copyrighted materialOnly copyright is coveredPresence of make available clauseAbsence of make available clause
55 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 designMoU of the India USA Tax Treaty:Technology will be considered "made available" when the person acquiring the service is enabled to apply the technologyProvision of requiring technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made availableUse of a product which embodies technology shall not per se be considered to make the technology availableIf the services do not “make available” technical knowledge, etc., then, they are outside the ambit of FIS Article and not taxablePlethora of decisions on the subject
56 I Co. is engaged in business of prospecting and mining of minerals Case Study – FTS in case of treaty countryF Co.I Co. is engaged in business of prospecting and mining of mineralsI Co. enters into agreement with F Co. for providing geophysical data for extracting mineralsPayment of considerationRendering of technical servicesSingaporeHowever, no technical expertise/ skills rendered by F Co. to attract tax liability (CIT vs. De Beers India Minerals Pvt. Ltd.)IndiaExtraction of mineralsI Co.‘Make Available’ should enable the person acquiring the service to apply the technology contained therein – India Singapore DTAA
57 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 customersRevenue taxed the payment received from customers as royaltyImport of software package as floppy/ CDUSCourt observed that license was non-exclusive and non transferable and licensee was permitted to make only one copy of the softwareIndiaBranch OfficeA mere case of transfer of copyrighted article without any transfer of copyright and hence cannot be taxed as royalty (DIT v. Infrasoft Limited)PaymentCustomersGranting of copyright is in nature of royalty vis-à-vis transfer of copyrighted article is in nature of sale
58 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 ownedPlace 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 sufficientBusiness 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
59 Permanent Establishment issues Paragraph 2 - Examples of a PEPlace of managementBranchOfficeFactoryWorkshopMine, an oil & gas well, a quarry or any other place of extraction of natural resourcesWarehouse in relation to persons performing storage facilities for othersFarm, plantation or other place where agriculture, forestry, plantation or related activities are carried onStore or premises used as sales outletServices 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
60 Permanent Establishment issues Paragraph 3 - Exclusions from definition of PEUse of facilities solely for purpose of storage or display of goods or merchandise belonging to enterpriseMaintenance of a stock of goods or merchandise belonging to enterprise solely for purpose of storage or displayMaintenance of a stock goods or merchandise belonging to enterprise for purposes of processing by another enterpriseMaintenance of a fixed place of business solely for purpose of purchasing goods or merchandise or of collecting information, for enterpriseMaintenance 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
62 Characteristics of Secondment Obligation to completeWarranty for quality of workService arrangementAdd cost to complete unfinished workSupervision, Control, Direction, Authority to instruct, ReviewRight, Responsibility, Risk, RewardsPower to disqualify, replacement and recallCommercial justification:Specific or generalQualification of SecondeeIPR ownershipCost or mark-upRight of Lien on foreign employmentEconomic Employer
63 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 CoNo formal Secondment agreement is executedSalary of seconded staff paid by P Co, subsequently reimbursed by Sub CoBasic employment agreement between seconded staff and Sub CoIssueSeconded 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 taxPotential risk of Permanent Establishment (PE) for parent company since employees posted in India
64 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 basisThe 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 secondmentThrough the employment agreement, the Sub Co must exhibit that itPossess sole right to fix or agree to specific scope of work, salary, termination criteria, reporting norms for the seconded employeeTreats the seconded employee at par with other employees
65 Deputation issuesSubstance of the agreement and intention of the partiesWhether the arrangement can be termed as a FTSScope of FTS under the TreatyWhether the activity results in a PE
66 Rendering of services Vs. provision of services Deputation issuesRendering of services Vs. provision of servicesProvision of services – to be considered under Fees for technical servicesRendering of services – to be considered under Dependent Personal ServicesTestsWhich 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 andWhich entity determines the number and qualification of the individuals performing workTest of Real employer
67 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.
68 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 servicesThat services performed by the seconded employee are actually performed on behalf of the parent company and not as an employee of the Indian CompanyThat 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 statusThat 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.
69 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 companyReimbursement 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 performanceReal 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 countryThat overseas parent company does not render any service to the Indian enterprise and is only paying salary to the seconded employee for administrative convenience
70 Service PEService PE under the OECD Model Tax Convention and the UN Model Tax ConventionOECD Model Tax Convention – No specific provision for service PEUN 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 periodService PE under DTAAs between India and other countriesRationale is to tax the enterprise of the home country for its economic activities in the host country beyond a threshold limitWhen is a service PE deemed to be concluded?
71 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:
72 Service PE Country Services provided to a non-related enterprise Services provided to a related enterpriseAustraliaMore than ninety (90) days within any twelve (12) month periodOne (1) dayCanadaSingaporemore than ninety (90) days within any fiscal yearMore than thirty (30) days in a fiscal yearChinaMore than one hundred and eighty-three (183) daysNot providedNorwaySix (6) months within any twelve (12) month periodUnited KingdomMore than ninety (90) days in a twelve (12) month periodMore than thirty (30) days in a twelve (12) month periodUnited States of America
73 Service PEDTAAs 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 12Canada – 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)
74 Case Study- Verizon Data Services BackgroundVerizon 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 USSuch 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 USGTE 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 USGTEUSPersonnelIndiaReimbursementVerizon (India)74
75 Case Study - Verizon Data Services (contd.) RulingPayments not in the nature of reimbursementReceipt in the hand of GTE Company and personnel are of different character from different sourcesBy correlating the two payments, the substance of the transactions would not change to give it the character of reimbursementReceipt 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 CompanyManagerial services performed by the personnel as employees of GTE US and not that of Indian companyPayment would be FTS under Indian Tax Law as well as FIS under tax treatyExistence and taxability of PE not addressed as amount taxable under FTS/FIS.75
77 Indirect Transfers Vodafone Wins $2 bn Tax Case in Supreme Court January 20, 2012Finance Act India Imposes Tax on indirect transfer of Indian assetsMay, 2012India makes retrospective changes to the law that would effectively reverse the decision of the Supreme Court in the Vodafone caseAllows 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 assetsA 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 IndiaSupreme Court held that Indian Tax authorities have no basis to tax the sale of indirect interests held in the Indian CompanyMajor Transactions impacted by such retrospective amendmentsMitsui – Vedanta deal – Sale of 51% in Sesa Goa to VedantaSABMiller’s acquisition of 100% stake in Fosters IndiaDampened Enthusiasm for International Investment in IndiaSanofi Aventis’ acquisition of majority stake in the Indian vaccine company Shanta BiotechKraft – Cadbury takeover deal
78 The Vodafone Litigation :: The Transaction HTIL (Cayman Islands)Vodafone (VIH B.V) NetherlandsThe TransactionSPA for sale of shares of CGPIn February 2007, VIH B.V acquired 100% shares in CGP Holdings, Cayman Islands for USD 11.1 billion from HTILHTI (BVI) Hldgs (BVI)International Holding CompanyCGP through various intermediate companies/contractual arrangements controlled 67% of HEL, IndiaCGP (Cayman Islands)The acquisition resulted in VIH acquiring control of CGP and its downstream subsidiaries including HEL3 GSPL (Mauritius)(Indirect)Mauritius Cos.(Indirect)HEL was a joint venture between Hutchinson Group & Essar GroupOption to acquire 15.03%51.96%HEL, India
79 The Vodafone Litigation :: Background December 2008Open offer made by Vodafone for HTIL’s stake in HELVIH gave binding offer for acquiring entire shareholding in CGPVIH entered into SPA with HTIL through which VIH would own 42% direct interest in HEL. Through CGP it would own indirect interest in HELIn 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 IndiaJanuary 2009In response to Writ filed with Supreme Court, the Supreme Court directed the tax to first determine the jurisdictional challenges raised by VodafoneIt also permitted Vodafone to challenge the decision of the tax authorities on the preliminary issue of jurisdiction before the High CourtSeptember 2007Notice was issued by the Tax Authorities to VIH for failure to withhold tax u/s 195 on payment made to HTIL indirectlyNotice also included claim that VIH be treated as agent of HTIL u/s 163September 2010Bombay High Court dismissed petition of VIHVodafone files appeal with Supreme CourtSupreme Court directs Vodafone to discharge tax demand of INR.2500 crores3 member bench led by Chief Justice of India pronounced order with majority in favor of Vodafone on 20th January 2012October 2007Writ Petition filed stating that the Tax Authorities do not have jurisdiction over sale of shares between two non-residentsClaimed it to be Not-Taxable in India
80 The Vodafone Litigation :: Key Issues & SC Observations Presently, indirect transfer of an asset in India is not Taxable under the Income Tax ActKey IssuesSC ObservationsWhether 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 IndiaThe 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 sharesWhether 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 etcContd…..
81 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 substanceWhether 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-residentIn 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 evasionWhether 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
82 ‘Capital Asset’ to include management & control rights Finance Act Rewrites Legislation Retrospectively :: Taxing Indirect Transfer of Indian AssetsNon-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 AprilKey AmendmentsKey Impact‘Capital Asset’ to include management & control rightsTransfer 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 entityTransfer would now include indirect transfer of shares if rights in such shares are effected and dependent upon transfer of shares even of a foreign companyWidens 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 IndiaScope of term ‘through’ clarified to include ‘by means of’, ‘in consequence of’, or ‘byreason 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 alwaysincluded 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 alwaysincluded 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 alwaysmeant and included “by means of”, “in consequence of”, or “by reason of”.Section 195An explanation has been added to Section 195 of the IT Act, to clarify that the obligation under Section 195(1) to make deduction shall bedeemed 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 IndiaThe amendment widens the withholding tax provisions of Section 195 of the ITA by applying it to all persons whether resident or non- resident
83 Retrospective Amendment applicable from 1962 Finance Act Rewrites Legislation Retrospectively :: Taxing Indirect Transfer of Indian AssetsKey AmendmentsKey ImpactRetrospective Amendment applicable from 1962Despite 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 yearsThis amendment could enable the tax authorities to reopen cases for the aforesaid extended period.Clarification Provided by CBDTThe 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 effectThe 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`
84 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 IndiaComputation mechanism not prescribedTaxability based on the proportion of the value of the India business to the global valueWhether gross or net value of India assets to be considered?Applicability of Treaty provisions?
86 Taxing Indirect Transfers International TrendsPERUUSSOUTH KOREAAUSTRALIACHINATaxing Indirect TransfersChina 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 purposeUnder 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 agreementThe 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 transferorChinese Tax authorities received $25 mn capital gains tax payment resulting from an indirect stock transfer, in 2010….Indonesia, Mexico etc….
88 GAAR – Basic Provisions Main purpose or one of the main purposes is to obtain a tax benefitANDNot atarm’s-lengthMisuse/abuse of tax provisionsLacks commercial substanceNot for bona-fide purposesORORORImpermissible Avoidance Arrangement (IAA)ConsequencesDisregard / combine / re-characterize whole / part of the arrangementDisregard corporate structureDeny treaty benefitRe-assign place of residence / situs of assets or transactionRe-allocate income, expenses, relief, etc.Re- characterize Equity- Debt, Income, Expenses, relief, etc.
90 Modes of Acquisition Acquisition Business Purchase Share Purchase SlumpSaleItemizedSale
91 Acquisition through the Slump Sale route MeaningSlump 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 SatisfyBusiness sold as a whole on a going concernDocuments not to indicate item-wise value of the assets transferredOthersConsideration - can be discharged by issue of shares / payment of cashConsideration is received by company which is transferring the undertaking and not its shareholdersCan be achieved through shareholder resolution and a business transfer agreementSpecial provisions for computation of capital gains in case of slump sale – Section 50BNo Indexation benefit for undertaking
92 Acquisition through the Slump Sale route Computation Mechanism ~ Capital GainsCapital gains = Slump Price – Networth of the transferred undertakingComputation Mechanism ~ Net WorthNetworth of the Undertaking = Tax WDV of depreciable assets + Book value of other assets – Book value of liabilitiesRevaluation of assets to be ignored while calculating networth
93 Acquisition through the Slump Sale route A Pvt. Ltd.UndertakingWhat will constitute as an undertaking?ConsiderationWhether lump sum consideration is to be discharged in cash or shares can be issued?If networth of the undertaking transferred is negativeWhether to be considered as zero?Carry forward of lossesWhether the losses pertaining to the undertaking can be transferred?Section 50B v/s Section 50CWhether the provisions of Section 50C would be attracted in case of land being the only asset in the undertaking proposed to be transferred?Business ABusiness BSlump saleB Pvt. Ltd.
94 Acquisition through Itemised Sale MeaningSale of assets & liabilities with values assigned separately for each item of assets and liabilitiesTax ImplicationsDepreciable assets - as per provisions of Section 50 (Short Term Capital Gains)Capital assets - as per provisions of Section 45 read with Section 48Current assets - Business profitsOthersBenefit of indexation would depend on the character of the asset.Brought forward losses & unabsorbed depreciation related to the undertaking not transferredCost of acquisition to the Purchaser - consideration paid for each asset
95 Acquisition through Share Purchase Seller PerspectiveAcquirerNature of shareLong Term Capital Asset (>12 months)Short Term Capital AssetEquity share of a listed company subject to STTExempt15.45%Equity Shares of a listed company without payment of STT20.6%(with indexation)30.9%Any other sharesConsiderationsharesTarget*Surcharge as applicableBuyers PerspectivePrice paid for shares would be the buyers cost of acquisition of sharesPreservation 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
97 Acquisition through the merger route MeaningMerger of one or more companies into anotherMerger of two or more companies to form a new companyPrescribed ConditionsTransfer of all properties and liabilitiesAllotment 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 holdingCost of acquisition = cost of acquisition of shares in amalgamating companyPeriod of holding = Period of holding of shares in amalgamating company to be counted
98 Acquisition through the merger route DepreciationIn the hands of amalgamating company - Depreciation in year of transfer – available on pro-rata basisIn the hands of amalgamated company - the basis of tax written down value in the hands of amalgamating companyImplicationsNo capital gain on transfer of capital assets both in the hands of amalgamating company and its shareholdersExpenses incurred on amalgamation are tax deductibleLosses of amalgamating company available to the amalgamated company subject to compliance with conditions of Section 72A of Income tax Act (“ITA‟)
99 Acquisition through the merger route Loss of Rs. 10 crMat Credit ~ Rs. 10 crA Pvt. Ltd.A Pvt. Ltd.A Pvt. Ltd.Tax holiday under S. 80IAMerger100%MergerMergerB Pvt. Ltd.B Pvt. Ltd.B Pvt. Ltd.Merger of B Ltd. Into its holding company A Ltd.No issue of shares on mergerWhether 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
100 Acquisition through the De-merger route MeaningDemerger 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 companyPrescribed ConditionsTransfer of all properties and liabilities at book valuesDischarge of consideration by issue of shares on proportionate basisAllotment 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 basisCost of Acquisition & period of holdingCost 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
101 Acquisition through the De-merger route DepreciationDepreciation allowable in the ratio of the actual number of daysCost of acquisition and Written Down Value (WDV) of depreciable assetsActual 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 demergerBlock 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.LossesLosses - Available to the resulting companyDirectly relatable to undertaking being transferredNot directly relatable –proportionate to the assets transferred
102 Acquisition through the De-merger route UndertakingWhat 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 considerationCan the resulting company issue preference shares as consideration for demerger?Continuity of benefits of tax holidayWhether 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 lossesWhether the demerged undertaking to be an industrial undertaking?A Pvt. Ltd.(Demerged Co.)Business ABusiness BDemergerB Pvt. Ltd.(Resulting Co.)
104 Key Questions while going outbound How can I reduce the effective tax rateHow do I reduce burden arising from repatriation of fundsHow much can I invest overseasWhat are the regulations in the host countryHow to optimize exitShould the IP be migrated to a tax efficient jurisdictionWhat should be my global taxstructuring approachWhere should I source acquisition finance from
105 Key objectives Maximising shareholder value Minimising global tax costsEase in intra-group funds flowIPO considerationsAlignment with investor objectives - strategic or financial investorsCompliance with regulatory framework
106 Global Transfer Pricing Some Deciding factorsForeign Country RisksExit Tax PlanningComplex tax environment in U.S./ EuropeForeign Exchange regulationsMode of investingEntity structuringStructuring International acquisitionInternational holding purposesPost acquisition structuringKey ConsiderationsGlobal Transfer PricingIndia ConsiderationsIncrease in inter company transactions as Indian company acquire foreign companiesTP documentation requirementMulti jurisdiction documentation compliance requiredIndia regulatory aspectAchieving tax efficient circulation of cash within foreign structureRepatriation planning for mitigating India tax costForeign tax credit issues
107 Tax – Pivot to business decisions ! The ‘tax’ effect33.99 percentAppropriate Acquisition StructureIntermediate Holding CompanyChoice of JurisdictionFunding OptionsTransfer PricingIP Holding CompanyOverall effective tax rate of Global BusinessTax – Pivot to business decisions !
109 Forms of business presence Modes of investing overseasUnincorporatedIncorporatedBranchLiaison OfficeCompanyWOSJVJoint venture company (JVC)Greenfield or Acquisition
110 Forms of business presence Choice of Entity StructuresHybridBranchLegalLosses can be consolidated but inability to defer India taxIncome attribution issuesCan combine benefits of corporate form with flexibility of partnershipsTaxation in India deferred until repatriationEconomic double taxation on repatriation
111 Limited Liability Companies (LLC) Limited Liability Partnership Forms of business presence – a brief comparisonBranch OfficeGenerally gives rise to taxable presence in foreign countryDouble Taxation Avoidance Agreement (DTAA) to determine the existence of Permanent Establishment (PE) in foreign countryLosses can be consolidated but inability to defer India taxIncome attribution issuesCorporationTaxed in accordance with domestic laws of the country of incorporationsSome countries prescribe different tax rates for Global business companiesPartnershipTaxability of partnership firm under the domestic tax laws vis-à-vis taxability of partner shareLimited Liability Companies (LLC)Entitled to same tax and limited liability benefits as a CorporationTrustTaxability of trust varies according to the governing domestic tax lawsGenerally, income of trust bears tax in the hands trusteesLimited Liability PartnershipTreated as a normal partnership for tax purposes.Taxability of partnership firm vis-à-vis partner share
112 Case Study – Forms of business presence Taxability of a CompanyTaxability of a BranchIndian CompanyUAE IHCIndiaOutside IndiaTurkeyQatarOmanKuwaitBahrainSaudiIraqIranTax Rate- 10%Dividend – NilInterest – 7%Tax Rate- 15%Interest – NilTax Rate- 20%Dividend – 5%Interest – 5%Tax Rate- 25%Dividend – 10%*Interest – 10%Tax Rate- 12%Tax Rate- NilInterest – 15%UAE to set up company in the TargetsBranch profit- 5%Branch profit- 15%UAE to set up a branch in Targets
114 Direct Investment from India into Target Co. SubsidiaryIndiaTarget countryDirect InvestmentsIndian CompanyDirect Investment leads to immediate taxationNo flexibility to time dividend/interest and capital gains to be received back in IndiaIncreased tax burden if Target in high tax jurisdictionLimited capacity to borrowBorrowing’s Interest to effect EPS/market capitalization of Indian Co.
115 Harnessing the benefits of an IHC Indian CompanyFlexibility to up-stream returnsPossibility of reducing withholdings on paybacksMinimise tax incidence on exitDeduction of funding costs at IHC levelEnhanced ability to leverage on group strengthMinimise overall group tax rateIndiaInvestmentInternational Holding CompanyJurisdiction of intermediate companyTarget countryInvestmentSubsidiary
117 New regulations POEM CFC General Anti-Avoidance Rules (“GAAR’) Direct Tax CodeWide sweeping in nature - Encompass all kinds of schemes, structures, transactions that could be used to avoid taxesGuidelines on GAAR notified – covers all transactions post August 2010 with certain exceptions prescribedControlled Foreign Corporations (‘CFC’)Income of Holding Company taxed in India without actual distribution where Holding Company qualifies as a CFC under the proposed DTCCFCPOEMPlace of Effective Management (‘POEM’)Taxability of the worldwide income of foreign company where the POEM is demonstrated in India117
118 Imperative to evaluate impact of CFC on outbound structure Introduction of CFC provisionsReport of Working Group on Non- Resident Taxation (2003) recommended enacting of CFC provisionsCFC provisions were not part of original DTC 2009Introduction of CFC provisions hinted in RDP in June, 2010CFC provisions introduced in Twentieth Schedule in DTC 2010Income attributable to a CFC proposed to be taxed in the hands of the resident tax payerActual subsequent distribution by CFC not to be taxed in the hands of the resident tax payerEquity / preference shares held in a CFC liable to Wealth-taxResidency test for foreign companiesResidency test for foreign companies based on Place of Effective Management (POEM)Income of foreign company with POEM in India will be taxable in IndiaDividends declared by such foreign company will be liable to DDT in IndiaImperative to evaluate impact of CFC on outbound structure
119 CFC testsIndian CompanyConditions for qualifying as CFCControlDirect 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.IndiaOutside IndiaTrading cum Holding CompanyCFCPassive Income - Dividend, Interest, Royalty, sale to related partiesExemptionTurkeyQatarOmanQuwaitBahrainSaudiIraqIran“Specified income” of CFC - Rs.25 lakhs or below; orCFC engaged in active trade/business and passive & other related party income < 50%; orCFC 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
120 Computation mechanism A – “Specified Income” of CFCB - Higher of % of value of capital% of voting shares or interestC – No of days voting shares / capital /interest held by resident in CFCD – No of days Foreign Co was a CFCIncome attributable to CFC = A * B * C100 DM – 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 assetsO – Interim Dividends paidP – Losses of Prior yearsQ – No of days Foreign Co was a CFCR - No of days in accounting period“Specified income” = (M+N–O–P) * Q / Rof CFCCFC to impact overseas investments / intra-group supply chain arrangementsComputation mechanism encompasses “Active” as well as “Passive” income !!
121 Case Study – Computation of Passive Income Illustrative projectionsAmount in Rs. CroresNote:Sales to related parties is counted as Passive incomeInterest/ Dividend etc is accounted for as Passive incomeTest requires that Passive income should be <50% of Total incomeIn 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
122 Trading cum Holding Company POEMDTC 2010 proposes to tax the worldwide income of foreign company where the Place of Effective Management (‘POEM’) is demonstrated in IndiaResidency Rule:A company is resident in India if its “place of effective management, at any time in the year, is in IndiaDefinition:the place where the board of directors of the company or its executive directors, as the case may be, make their decisions; orin 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 functionsIndian CompanyIncome earned by the Trading cum Holding company to be taxedIndiaOutside IndiaTrading cum Holding CompanyImperative to hold Board meetings, have local directors, make business decisions in Trading CompanyImpact / IssuesTurkeyQatarOmanQuwaitBahrainSaudiIraqIranExpression ‘at any time’ very wide.Meaning of the expressions ‘routinely’ / ‘commercial and strategic decisions’?
123 I Co. holding F Co. through IHC Case Study – Use of SPVs (Controlled Foreign Company)I Co.I Co. holding F Co. through IHCUse of SPV/ IHC designed to delay/avoid Indian taxes on the dividend income to be received from F Co.IndiaOverseasIntermediate Holding Company (IHC)F Co.CFC like taxation of the income of IHC in India- Invoking the GAAR provisions on deferral of income?
125 Why secondmentCompanies seeking to do business in world markets - can be successful by having its appropriate talent placed globallySending employees overseas is a great talent management / retention toolNumber of outbound assignees - increased considerably, mainly fuelled by growth in IT outsourcingLarge number of outbound employees - junior management and technology personnelMajor outbound population – IT, Healthcare, Banking, Retail, etc.
126 Tax considerationsCountry-wise evaluation of Permanent Establishment (“PE”) exposure for Indian company resulting from presence of its personnel in various locationsExamination of availability of “tax credit” in India on foreign taxesEvaluation of contracting model for assignment of personnel to mitigate PE exposureTransfer pricing legislationCompliance with tax filing requirements by Indian company based on foreign tax laws
127 Employer – Employee HOME COUNTRY HOST COUNTRY Departure formalities Residential statusTax filingsReporting overseas incomeTax credit on overseas incomeTax RefundsHost Country tax registrationTax filingsReporting of Indian incomeEmployment incomeBonusStock optionsOther incomeTax credit
128 Case Study- Global E-Business Operations Overseas CompanyFactsUnder a Secondment Agreement, ABC Company seconded its employees to the Overseas CompanyABC 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 employeesIssues for ABC CompanyTaxability of the payment received from Overseas Company?Services to the Overseas CompanyReimbursement by Overseas Company of the remuneration paid by ABC CoSeconded EmployeesOverseasIndiaEmployees seconded to Overseas – Remuneration paid by ABC Co.ABC Company