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0 Presentation on tax issues – Inbound & Outbound December, 2013.

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1 0 Presentation on tax issues – Inbound & Outbound December, 2013

2 Agenda 1 Setting the context 1 1 Key Challenges 2 2 Key Considerations for inbound investments 3 3 Forms of business presence for foreign companies 4 4 Capital structuring 5 5 Cross border tax issues 6 6

3 Agenda…. (Contd.) 2 Indirect transfer of shares 7 7 Acquisition tax issues 8 8 Key considerations for outbound investments 9 9 Forms of business presence overseas 10 Use of International holding company 11 Proposed Direct Tax Code - Impact on outbound investments 12

4 Setting the Context

5 Setting the Context… the Indian tax climate 4 Dynamic and evolving tax environment to impact present and future investment cycle  Tax on indirect transfer – ambiguity in provisions  Transfer pricing legislations/ litigations – impact on structures  Proposed CFC Regulations – planning future investments?  Eligibility to Treaty benefits and unilateral treaty override  Retrospective amendments – uncertainty on investment structure  Introduction of GAAR provisions – substance over form

6 Key Challenges

7 6 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

8 Key Challenges 7 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

9 Key considerations – planning inbound investments

10 9 EconomicPoliticalCulturalLegalFinancialTechnology System Stability Philosophy Risk Social System Ethics Religion Diversity Resources Purchasing power Exchange rates Demographics Corporate Laws Regulations Tax Laws Judiciary System Fund availability Investor value Banking System Growth rate Savings Capital formation Labour Laws Environment Factors impacting decision making Key considerations

11 10 Repatriation Exit Grooming Structuring Getting Started 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 Inbound investment life cycle

12 Questions to be answered? 11 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

13 Key Challenges 12 Maximising shareholder value Minimising global tax costs Alignment with investor objectives Ease in intra-group funds flow Determination of efficient intermediate jurisdictions for positioning of SPVs Compliance with tax, regulatory and legal framework in India and in the relevant host country Considerations for fundraising

14 Forms of business presence

15 14 Forms of business presence Wholly owned subsidiaryJoint Venture Branch Office / Project Office Liaison Office Technology Transfer & Licensing Agreement Services Agreement Entity options Other Options

16 15 Forms of business presence ParticularsLiaison OfficeProject OfficeBranch 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 % Unincorporated entitiesIncorporated entities 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

17 16 Forms of business presence – a comparison ParticularsLiaison OfficeProject OfficeBranch 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 formExtension of the Parent Separate legal entity Taxable presence Does not per se result in taxable presence 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

18 17 Case Study 1 – Form of business presence F Co. (UK) IndiaChinaSri Lanka Exports finished goods Ideal form of business presence? – Establishment of Liaison Office F Co. is an exporter of finished goods. Contracts executed in home country Requires temporary space for executing marketing activities in exporting countries

19 Capital structuring

20 19 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

21 20 Funding instruments Impact of Financials Income Tax Act, 1961 FEMA Companies Act, 1956 Stamp Duty KEY PARAMETERS

22 21 Funding instruments Equity Shares Equity Instruments Compulsorily Fully Convertible Debentures (‘FCD’) Compulsorily Convertible Preference Shares (‘CCPS’) Debt Instruments External Commercial Borrowings (‘ECB’) Withdrawal of funds Generally not possible during company’s lifespan Cannot be redeemed prior to conversion Minimum average maturity period prescribed End-use restrictions None Generally permitted for capex purposes in real/ industrial/ infrastructure sector. Not permitted for working capital etc.

23 22 Funding instruments - Comparison ParametersEquityCCPSCCD (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)

24 23 Funding instruments ParametersEquityCCPSCCD (Quasi-debt) ECB Tax rateDDT % 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% DeductibilityDividends and DDT not deductible Same as equityInterest 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

25 24 Case Study 2 – Funding through Convertible Debentures F Co. I Co. Denial of interest benefit to I Co. on re-characterization of debt to equity ? 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 Infusion of funds through CCDs Interest paid on CCDs Overseas India

26 Repatriation strategies

27 26 Repatriation strategies Dividend distribution 1 Royalty/ Fee for Technical Services 2 Interest 3 Share transfer 4 Buy back of shares 5 Capital reduction 6 Various modes of cash repatriation to Parent Company Imperative to evaluate the tax implications under respective treaties

28 27 Cash repatriation Buy Back Capital Reduction Purchase of asset from overseas company DDT % Tax applicable on the company distributing such dividend Tax on distributed 22.66% (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? Dividend Distribution 1 Distribution tax applicable to the company carrying out buy back

29 28 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

30 29 Case Study 3 – Buyback of shares from a treaty country F Co. I Co. Distribution tax applicable on buyback – Finance Act 2013 IHC to buyback its shares from I Co. Intermediate Holding Company (IHC) Overseas India Favorable tax jurisdictionBuyback of shares IHC can claim the benefit of the applicable tax treaty As per applicable tax treaty(favorable tax jurisdiction),capital gain may not be taxable in India However capital gain will be taxable in India in case of buyback of shares from a non treaty country

31 30 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

32 31 UK Co. Indian Co. Setting up a presence in the form of a subsidiary Overseas India JV Partner UK Co. LLP Setting up a presence in the form of a LLP, which would be subject to approvals Overseas India JV Partner Step 1 – Deciding the form of presence to be established in India Case study 4 – Inbound lifecycle

33 32 UK Co. Indian Co. Overseas India 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 JV Partner X% y% Case study 4 – Inbound lifecycle

34 33 UK Co. Indian Co. UK Co. Indian Co. UK directly investing into Indian Co. UK investing via Singapore Overseas India Overseas India Step 3 – Deciding the need for an intermediate jurisdiction Singapore Case study 4 – Inbound lifecycle

35 34  India - UK Vs. India -Singapore 1. Withholding rates for revenue streams – Dividend, Royalty/ FTS, Interest TreatyCGTRoyalty/ FTSInterest SingaporeOnly in Singapore10%10%-15% UKBoth states10%-20%10%-15% 1. Corporate tax rates – 17% Vs. 23% 2. Evaluate exemption for foreign dividends 3. WHT on dividends paid further – no WHT in Singapore 4. Evaluate CFC laws for parent company  Taxability under local laws Case study 4 – Inbound lifecycle

36 35 UK Co. Indian Co. UK Co. Indian Co. Stake sale by UK Vs. buy back Stake sale by Singapore Vs. buy back Overseas India Overseas India Step 4– Repatriation and exit taxes Singapore Case study 4 – Inbound lifecycle

37 36 Case study 5 – Inbound presence via Acquisition Shareholder Indian company Acquirer Shares Transfer of shares Consideration Acquirer purchases shares from existing shareholders Consideration flows directly to shareholder Transaction – Acquisition of shares Vs. business

38 37 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 Case study 5 – Inbound presence via Acquisition

39 38 Shareholder Indian company Acquirer 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 Transaction – Acquisition of shares Vs. business New Company Consideration Transfer of business under slump sale Case study 5 – Inbound presence via Acquisition

40 39 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 Case study 5 – Inbound presence via Acquisition

41 40 Shareholder Indian company Acquirer Instead of acquiring the operations (lock, stock and barrel), the acquirer purchases specific assets/ liabilities Transaction – Acquisition of shares Vs. business New Company Consideration Transfer of assets & liabilities Case study 5 – Inbound presence via Acquisition

42 41 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 Case study 5 – Inbound presence via Acquisition

43 42 1 Open to dispute 2 Based on type of entity and extent of acquisition SharesBusinessAssets Step-up of depreciation NoYes Availability of benefit of tax losses ConditionalNo – continues in Seller co Sales TaxNo Yes Stamp dutyYes – on sharesYes – subject to evaluation Yes - subject to evaluation Case study 5 – Inbound presence via Acquisition

44 Cross border tax issues

45 44 Key Challenges Exit taxes – Capital gains Income Characterisation Deputation issues Withholding tax Taxable presence - PE Cross border tax

46 45  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? Tax treaty network

47 46 What investors look for CountryCapital gains – sale of sharesRoyaltyFTSInterest SingaporeAlienator State10% 10%/15% MauritiusAlienator State15%No articleRate not prescribed UKTaxable in both States15%-20% 0%-15% NetherlandsTaxable 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%) 10% LuxembourgAlienator State10%

48 47 Royalty & FTS Taxable under the Act? DTAA need not be applied Analyze DTAA Taxable under DTAA Not taxable under DTAA Opt for DTAA if more beneficial Opt for Act if more beneficial No Yes

49 48 Royalty rates as per domestic tax laws  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, 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 Royalty30%20%10%25% FTS30%20%10%25% Note: All rates are exclusive of applicable surcharge and education cess Enhanced withholding tax rate of Royalty and FTS payments (Finance Act, 2013)

50 49 Royalty & FTS Primary right to tax with the country of residence Most treaties provide the country of source to levy tax up to a maximum level on a gross basis 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) Resident State Source State PE in source state

51 50 Royalty & FTS 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. Right of the states to tax

52 51 Royalty & FTS ‘Royalties’ is typically defined to mean payments of any kind received as a consideration for use of or right to use: o any copyright of literary, artistic or scientific work including cinematograph films, or films or tapes used for radio or television broadcasting o any patent, trade mark, design or model, plan, secret formula or process o 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) Article 12 - Royalties and fees for technical services

53 52 Royalty & FTS Rate Arbitrage Definition arbitrage Rates under the respective DTAA may be lower than the rates under the Act Definition under the DTAA may be narrower than the definition under the Act Act or DTAA whichever is more beneficial

54 53 Royalty & FTS o Income Tax Act o DTAA 40% on net basis, if PE exists 25% on gross basis 40% on net basis, if PE exists Rate as applicable Rate Arbitrage

55 54 Royalty & FTS Transfer of all rights Patent, invention, model, design, secret formula, or process or trade mark or similar property Only use of or right to use is covered or similar property is not used Copyright or copyrighted materialOnly copyright is covered Absence of make available clause Presence of make available clause Definition Arbitrage Income Tax ActDTAA

56 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 design MoU of the India USA Tax Treaty: o Technology will be considered "made available" when the person acquiring the service is enabled to apply the technology o Provision of requiring technical input by the person providing the service does not per se mean that technical knowledge, skills, etc., are made available o 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

57 56 F Co. I Co. ‘Make Available’ should enable the person acquiring the service to apply the technology contained therein – India Singapore DTAA I Co. is engaged in business of prospecting and mining of minerals Singapore India I Co. enters into agreement with F Co. for providing geophysical data for extracting minerals Case Study – FTS in case of treaty country Payment of consideration Rendering of technical services Extraction of minerals However, no technical expertise/ skills rendered by F Co. to attract tax liability (CIT vs. De Beers India Minerals Pvt. Ltd.)

58 57 F Co. Branch Office Granting of copyright is in nature of royalty vis-à-vis transfer of copyrighted article is in nature of sale Indian branch office of F Co. licensed the customized software's to the Indian customers US India Case Study – Transfer of software (a copyrighted article) Import of software package as floppy/ CD Customers Payment Revenue taxed the payment received from customers as royalty Court observed that license was non- exclusive and non transferable and licensee was permitted to make only one copy of the software A mere case of transfer of copyrighted article without any transfer of copyright and hence cannot be taxed as royalty (DIT v. Infrasoft Limited)

59 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 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

60 59 Permanent Establishment issues 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

61 60 Permanent Establishment issues 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

62 Deputation issues – Inbound

63 62 Characteristics of Secondment Obligation to complete Warranty for quality of work Service arrangement Add cost to complete unfinished work Obligation to complete Warranty for quality of work Service arrangement Add cost to complete unfinished work Right, Responsibility, Risk, Rewards Power to disqualify, replacement and recall Cost or mark-up Supervision, Control, Direction, Authority to instruct, Review Commercial justification: Specific or general Qualification of Secondee Commercial justification: Specific or general Qualification of Secondee Right of Lien on foreign employment IPR ownership Economic Employer

64 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 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

65 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 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

66 65 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

67 66 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

68 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.

69 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 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.

70 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 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

71 70 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?

72 71 Service PE 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)

73 72 Service PE CountryServices provided to a non- related enterprise Services provided to a related enterprise AustraliaMore than ninety (90) days within any twelve (12) month period One (1) day CanadaMore than ninety (90) days within any twelve (12) month period One (1) day Singaporemore than ninety (90) days within any fiscal year More than thirty (30) days in a fiscal year ChinaMore than one hundred and eighty- three (183) days Not provided NorwaySix (6) months within any twelve (12) month period Not provided United KingdomMore than ninety (90) days in a twelve (12) month period More than thirty (30) days in a twelve (12) month period United States of AmericaMore than ninety (90) days in a twelve (12) month period One (1) day

74 73 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)

75 Verizon US GTE India US Reimbursement Personnel Case Study- Verizon Data Services Verizon (India) 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.. 74

76  Payments not in the nature of reimbursement o Receipt in the hand of GTE Company and personnel are of different character from different sources o By correlating the two payments, the substance of the transactions would not change to give it the character of reimbursement o 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. o GTE Co has rendered managerial services to Indian Company o Managerial services performed by the personnel as employees of GTE US and not that of Indian company o 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. Case Study - Verizon Data Services (contd.) Ruling 75

77 Indirect transfers

78 77 Indirect Transfers 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 Mitsui – Vedanta deal – Sale of 51% in Sesa Goa to Vedanta SABMiller’s acquisition of 100% stake in Fosters India Sanofi Aventis’ acquisition of majority stake in the Indian vaccine company Shanta Biotech Major Transactions impacted by such retrospective amendments Dampened Enthusiasm for International Investment in India Kraft – Cadbury takeover deal 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

79 The Vodafone Litigation :: The Transaction 78 HTIL (Cayman Islands) Vodafone (VIH B.V) Netherlands HEL, India CGP (Cayman Islands) SPA for sale of shares of CGP HTI (BVI) Hldgs (BVI) 3 GSPL (Mauritius) (Indirect) International Holding Company Mauritius Cos. (Indirect) 51.96% Option to acquire 15.03% In February 2007, VIH B.V acquired 100% shares in CGP Holdings, Cayman Islands for USD 11.1 billion from HTIL CGP through various intermediate companies/contractual arrangements controlled 67% of HEL, India The acquisition resulted in VIH acquiring control of CGP and its downstream subsidiaries including HEL HEL was a joint venture between Hutchinson Group & Essar Group

80 The Vodafone Litigation :: Background 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 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 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 December 2008 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 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

81 The Vodafone Litigation :: Key Issues & SC Observations 80 Presently, indirect transfer of an asset in India is not Taxable under the Income Tax Act Whether any source of Income or Capital Asset said to be situated in India? Whether transfer of rights is incidental to a share transfer and only the situs of such shares should prevail? 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 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…..

82 81 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? 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 India Mauritius treaty would be applicable where Vodafone had divested directly at Mauritius level? In the absence of LOB clause and presence of CBDT circular 789 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 Applies only to payments made from a resident to a non-resident The Vodafone Litigation :: Key Issues & SC Observations Supreme Court ruled that the transaction was structurally valid and the tax authorities in India had no jurisdiction to tax such an overseas transaction

83 Finance Act Rewrites Legislation Retrospectively :: Taxing Indirect Transfer of Indian Assets 82 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 ‘Capital Asset’ to include management & control rights ‘Transfer’ to include parting with or creation of right, notwithstanding that such transfer flows from transfer of shares of an offshore entity Scope of term ‘through’ clarified to include ‘by means of’, ‘in consequence of’, or ‘by reason of’ 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 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 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 Key AmendmentsKey Impact 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

84 Finance Act Rewrites Legislation Retrospectively :: Taxing Indirect Transfer of Indian Assets 83 Key AmendmentsKey Impact 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. Retrospective Amendment applicable from 1962 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.  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 1 st 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` Clarification Provided by CBDT

85 Finance Act Rewrites Legislation Retrospectively :: Taxing Indirect Transfer of Indian Assets 84 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 o Taxability based on the proportion of the value of the India business to the global value o Whether gross or net value of India assets to be considered?  Applicability of Treaty provisions?

86 International Trends

87 86 PERU US SOUTH KOREA AUSTRALIA CHINA Taxing Indirect Transfers Indonesia, Mexico etc…. 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 China modified its tax code to tax “Indirect Transfers” of local companies and assets....(2008) Chinese Tax authorities received $25 mn capital gains tax payment resulting from an indirect stock transfer, in 2010….

88 GAAR Provisions

89 GAAR – Basic Provisions 88 Main purpose or one of the main purposes is to obtain a tax benefit Not at arm’s-length Misuse/abuse of tax provisions Lacks commercial substance Not for bona-fide purposes OR AND 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. OR

90 Acquisition Tax Issues

91 Modes of Acquisition 90 Acquisition Business Purchase Slump Sale Slump Sale Itemized Sale Itemized Sale Share Purchase

92 Acquisition through the Slump Sale route 91 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. Consideration - can be discharged by issue of shares / payment of cash o 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 Others Meaning Business sold as a whole on a going concern Documents not to indicate item-wise value of the assets transferred Tests to Satisfy

93 Acquisition through the Slump Sale route 92 Capital gains = Slump Price – Networth of the transferred undertaking Computation Mechanism ~ Capital Gains 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 Computation Mechanism ~ Net Worth

94 93 A Pvt. Ltd. Business ABusiness B B Pvt. Ltd. Undertaking o What will constitute as an undertaking? Consideration o Whether lump sum consideration is to be discharged in cash or shares can be issued? If networth of the undertaking transferred is negative o Whether to be considered as zero? Carry forward of losses o Whether the losses pertaining to the undertaking can be transferred? Section 50B v/s Section 50C o Whether the provisions of Section 50C would be attracted in case of land being the only asset in the undertaking proposed to be transferred? Acquisition through the Slump Sale route Slump sale

95 94 Acquisition through Itemised Sale Sale of assets & liabilities with values assigned separately for each item of assets and liabilities 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 Others Meaning 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 Tax Implications

96 95 Acquisition through Share Purchase Acquirer Target sharesConsideration Seller Perspective 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 Nature of shareLong Term Capital Asset (>12 months) Short Term Capital Asset Equity share of a listed company subject to STT Exempt15.45% Equity Shares of a listed company without payment of STT 20.6%(with indexation)30.9% Any other shares20.6%(with indexation)30.9% *Surcharge as applicable

97 Other Modes of Acquisition 96 Acquisition Merger Demerger

98 Acquisition through the merger route 97 Merger of one or more companies into another Merger of two or more companies to form a new company 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) Prescribed Conditions Meaning 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 Cost of Acquisition & period of holding

99 Acquisition through the merger route 98 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 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 ‟ ) Implications Depreciation

100 Acquisition through the merger route 99 A Pvt. Ltd. B Pvt. Ltd. 100%Merger Merger of B Ltd. Into its holding company A Ltd. No issue of shares on merger Whether qualifies the test on s. 2(1B) Impossibility of performance of conditions A Pvt. Ltd. B Pvt. Ltd. Merger Loss of Rs. 10 cr Merger of A Ltd. Into B Ltd. Carry forward of losses ~ s. 72A vs. s.79 – Which section to apply? A Pvt. Ltd. B Pvt. Ltd. Merger Mat Credit ~ Rs. 10 cr Merger of A Ltd. Into B Ltd. Whether B Ltd. can utilise MAT credit of A Ltd.? Continuity of Tax holiday? Tax holiday under S. 80IA

101 Acquisition through the De-merger route 100 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 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 Prescribed Conditions Meaning 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 Cost of Acquisition & period of holding

102 Acquisition through the De-merger route 101 Depreciation allowable in the ratio of the actual number of days Cost of acquisition and Written Down Value (WDV) of depreciable assets o Actual cost = Cost to the demerged company. o 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 o 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 - Available to the resulting company o Directly relatable to undertaking being transferred o Not directly relatable –proportionate to the assets transferred Losses Depreciation

103 102 A Pvt. Ltd. (Demerged Co.) Business ABusiness B B Pvt. Ltd. (Resulting Co.) Undertaking o What will constitute as an undertaking? Can single “investment ‟ constitute undertaking? o Whether the residual business i.e. the assets and liabilities remaining with the demerged company ought to be an undertaking? Discharge of consideration o Can the resulting company issue preference shares as consideration for demerger? Continuity of benefits of tax holiday o 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 o Whether the demerged undertaking to be an industrial undertaking? Acquisition through the De-merger route Demerger

104 Outbound Investment

105 Key Questions while going outbound 104 How much can I invest overseas How to optimize exit What should be my global tax structuring approach How can I reduce the effective tax rate How do I reduce burden arising from repatriation of funds Should the IP be migrated to a tax efficient jurisdiction What are the regulations in the host country Where should I source acquisition finance from

106 Key objectives 105 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

107 Some Deciding factors 106 Foreign Country Risks Exit Tax Planning Global Transfer Pricing India Considerations Key Considerations  Complex tax environment in U.S./ Europe  Foreign Exchange regulations  Mode of investing  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  Entity structuring  Structuring International acquisition  International holding purposes  Post acquisition structuring

108 The ‘tax’ effect 107 Overall effective tax rate of Global Business percent  Intermediate Holding Company  Choice of Jurisdiction  Funding Options  Transfer Pricing  IP Holding Company Appropriate Acquisition Structure Tax – Pivot to business decisions !

109 Forms of business presence

110 109 JV Joint venture company (JVC) WOS Greenfield or Acquisition Branch Modes of investing overseas Unincorporated Incorporated CompanyLiaison Office

111 Forms of business presence 110  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

112 111 Limited Liability Partnership  Treated as a normal partnership for tax purposes.  Taxability of partnership firm vis-à-vis partner share Limited Liability Partnership  Treated as a normal partnership for tax purposes.  Taxability of partnership firm vis-à-vis partner share Corporation  Taxed in accordance with domestic laws of the country of incorporations  Some countries prescribe different tax rates for Global business companies Corporation  Taxed in accordance with domestic laws of the country of incorporations  Some countries prescribe different tax rates for Global business companies Limited Liability Companies (LLC)  Entitled to same tax and limited liability benefits as a Corporation Limited Liability Companies (LLC)  Entitled to same tax and limited liability benefits as a Corporation 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 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 Partnership  Taxability of partnership firm under the domestic tax laws vis-à-vis taxability of partner share Partnership  Taxability of partnership firm under the domestic tax laws vis-à-vis taxability of partner share Trust  Taxability of trust varies according to the governing domestic tax laws  Generally, income of trust bears tax in the hands trustees Trust  Taxability of trust varies according to the governing domestic tax laws  Generally, income of trust bears tax in the hands trustees Forms of business presence – a brief comparison

113 112 Case Study – Forms of business presence 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% Dividend – Nil Interest – Nil Tax Rate- 20% Dividend – 5% Interest – 5% Tax Rate- 25% Dividend – Nil Interest – 5% Tax Rate- 20% Dividend – 10%* Interest – 10% Tax Rate- 12% Dividend – Nil Interest – Nil Tax Rate- Nil Dividend – Nil Interest – Nil Tax Rate- 15% Dividend – Nil Interest – 15% UAE to set up company in the Targets UAE IHC India Outside India Turkey Qatar Oman Kuwait Bahrain Saudi Iraq Iran Tax Rate- 10% Interest – 7% Tax Rate- 15% Interest – Nil Tax Rate- 20% Interest – 5% Branch profit- 5% Tax Rate- 25% Interest – 5% Tax Rate- 20% Interest – 10% Branch profit- 15% Tax Rate- 12% Interest – Nil Tax Rate- Nil Interest – Nil Tax Rate- 15% Interest – 15% UAE to set up a branch in Targets Indian Company Taxability of a Branch Taxability of a Company

114 Use of IHC

115 Direct Investment from India into Target Co. 114  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.  Subsidiary India Target country Direct Investments Indian Company 

116 Harnessing the benefits of an IHC 115  Subsidiary India Target country Investment  Indian Company  Investment Jurisdiction of intermediate company International Holding 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

117 Provisions of DTC

118 New regulations GAAR Direct Tax Code CFC POEM General Anti-Avoidance Rules (“GAAR’)  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 Place of Effective Management (‘POEM’)  Taxability of the worldwide income of foreign company where the POEM is demonstrated in India 117

119 CFC 118  Residency test for foreign companies based on Place of Effective Management (POEM) o Income of foreign company with POEM in India will be taxable in India o Dividends declared by such foreign company will be liable to DDT in India Introduction of CFC provisions Residency test for foreign companies  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 o Income attributable to a CFC proposed to be taxed in the hands of the resident tax payer o Actual subsequent distribution by CFC not to be taxed in the hands of the resident tax payer o Equity / preference shares held in a CFC liable to Wealth-tax Imperative to evaluate impact of CFC on outbound structure

120 CFC tests 119 CFC 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. Exemption 1.“Specified income” of CFC - Rs.25 lakhs or below; or 2.CFC engaged in active trade/business and passive & other related party income < 50%; or 3.CFC is listed on a stock exchange in the country of residence. Outside India Indian Company India Turkey Qatar Oman Quwait Bahrain Saudi Iraq Iran Trading cum Holding Company Passive Income - Dividend, Interest, Royalty, sale to related parties Profits of Trading cum Holding Company taxed in hands of the Indian parent without actual distribution if the qualified as a CFC

121 Computation mechanism 120 CFC to impact overseas investments / intra-group supply chain arrangements Computation mechanism encompasses “Active” as well as “Passive” income !! Income attributable to CFC = A * B * C 100 D “Specified income” = (M+N–O–P) * Q / R of CFC 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 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

122 Case Study – Computation of Passive Income 121 Amount in Rs. Crores Illustrative projections Important to establish active income test for qualifying for CFC exemption Note: 1.Sales to related parties is counted as Passive income 2.Interest/ Dividend etc is accounted for as Passive income 3.Test requires that Passive income should be <50% of Total income 4.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.

123 POEM 122 Outside India Indian Company India Turkey Qatar Oman Quwait Bahrain Saudi Iraq Iran Trading cum Holding Company Income earned by the Trading cum Holding company to be taxed 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 Expression ‘at any time’ very wide. Meaning of the expressions ‘routinely’ / ‘commercial and strategic decisions’? Impact / Issues Imperative to hold Board meetings, have local directors, make business decisions in Trading Company

124 123 I Co. F Co. CFC like taxation of the income of IHC in India- Invoking the GAAR provisions on deferral of income? I Co. holding F Co. through IHC Overseas India Use of SPV/ IHC designed to delay/avoid Indian taxes on the dividend income to be received from F Co. Case Study – Use of SPVs (Controlled Foreign Company) Intermediate Holding Company (IHC)

125 Deputation issues – Outbound

126 Why secondment 125 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.

127 Tax considerations 126 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

128 Employer – Employee 127 Departure formalities Residential status Tax filings Reporting overseas income o Tax credit on overseas income o Tax Refunds Host Country tax registration –Tax filings –Reporting of Indian income  Employment income  Bonus  Stock options  Other income –Tax credit HOME COUNTRY HOST COUNTRY

129 Case Study- Global E-Business Operations ABC Company Seconded Employees India Overseas Services to the Overseas Company Employees seconded to Overseas – Remuneration paid by ABC Co. Reimbursement by Overseas Company of the remuneration paid by ABC Co 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?

130 Questions?

131 Questions & Answers Questions & Answers

132 Thanks


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