0 presentation on tax issues – inbound & outbound december, 2013
TRANSCRIPT
1
Presentation on tax issues – Inbound & Outbound
December, 2013
Agenda
2
Setting the context1
Key Challenges 2
Key Considerations for inbound investments3
Forms of business presence for foreign companies4
Capital structuring5
Cross border tax issues6
Agenda…. (Contd.)
3
Indirect transfer of shares7
Acquisition tax issues8
Key considerations for outbound investments9
Forms of business presence overseas 10
Use of International holding company11
Proposed Direct Tax Code - Impact on outbound investments
12
Setting the Context
Setting the Context… the Indian tax climate
5
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
Key Challenges
Key Challenges
7
Effective tax rate of 33.99% for domestic companies and 43.26% for foreign companies
Additionally levy of Dividend distribution tax 16.99% on domestic companies brings the ETR to 43.5%
Use of tax treaties for planning investments Vs. eligibility of benefits
Capital structuring Vs. tax impact of returns
Withholding tax obligations in India on interest, royalties, fee for technical services, requirement of obtaining a PAN in India
Tax incentives available under the domestic tax regime
Key Challenges
8
Acquisition tax issues where presence is via inorganic route
Exit taxes on share sale @ 20% Vs. 30%
Tax laws in the home country of the investor relating to outbound investments viz. CFC, tax credits
Retrospective amendments impacting established structures
Rising litigation and uncertain tax positions
Ambiguity surrounding new laws and lack of well defined rules
Key considerations – planning inbound investments
10
EconomicPolitical Cultural Legal Financial Technology
System
Stability
Philosophy
Risk Social System
Ethics
Religion
Diversity Resources
Purchasingpower
Exchange rates
Demographics
Corporate Laws
Regulations
Tax Laws
JudiciarySystem
Fund availability
Investor value
Banking System
Growth rate
Savings
Capital formation
Labour Laws
Environment
Factors impacting decision making
Key considerations
11
RepatriationExit
GroomingStructuringGetting 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
Questions to be answered?
12
Form of entity to be established – business presence in India?
Form of Instrument in which investment to be made – Equity, Debt, Preferred Capital
Whether to invest directly or through an Intermediate Holding Company (‘IHC’)
Structure the tax considerations effectively during the lifecycle of the India investment
Repatriation and exit strategies
Key Challenges
13
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
Forms of business presence
15
Forms of business presence
Wholly owned subsidiary Joint VentureBranch Office /
Project OfficeLiaison Office
Technology Transfer & Licensing Agreement
Services Agreement
Entity options
Other Options
16
Forms of business presence
Particulars Liaison Office Project Office Branch OfficeWholly owned subsidiary/
Joint Venture
ActivitiesRepresentation/ communication
only
Execution of specific projects
Specified permissible
activities
Automatic/ prior approval route
TaxationGenerally a non-taxable presence
43.26% 43.26% 33.99% plus DDT 16.995%
Unincorporated entities Incorporated 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
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Forms of business presence – a comparison
Particulars Liaison Office Project Office Branch OfficeWholly owned
subsidiary/ Joint Venture
PurposeLiaison activities i.e. it acts as a channel of
communication
Executing a project in India
Permitted RBI activities - export, import, consultancy
research etc.
Permitted to carry out wide number of activities subject
to FDI guidelines
Legal form Extension of the ParentExtension of the
ParentExtension of the
ParentSeparate legal entity
Taxable presence
Does not per se result in taxable presence
Taxable presence Taxable presenceTaxed as an independent
legal entity
Tax ratesNA - Purpose is not
income earningRates applicable to Foreign company
Rates applicable to Foreign company
Rates applicable to Foreign company
Exit taxes
NA - since not permitted to carry out
any income generating activities
Required to file tax clearance certificate
Required to file tax clearance certificate
No requirement of filing tax clearance certificate as tax arrears are recovered on
winding up
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Case Study 1 – Form of business presence
F Co. (UK)
India China Sri 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
Capital structuring
20
Funding instruments
Equity Shares – same class or different classes of sharesA
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
Funding instruments
Impact of Financials
Income Tax Act, 1961
FEMA
Companies Act, 1956
Stamp Duty
KEY PARAMETERS
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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
Cannot be redeemed prior to
conversion
Minimum average maturity period
prescribed
End-use restrictions None None None
Generally permitted for capex purposes in real/
industrial/ infrastructure sector.
Not permitted for working capital etc.
23
Funding instruments - Comparison
Parameters Equity CCPS CCD(Quasi-debt)
ECB
Nature of instrument
Essentially considered as a part of Share Capital
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 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)
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Funding instruments
Parameters Equity CCPS CCD(Quasi-debt)
ECB
Tax rate • DDT payable @ 16.995% by distributing company on the amount of dividends
• Not taxable in the hands of shareholders
Same as for equity Interest – as per treaty rates
Dividend post conversion - same as equity
Interest – as per treaty rates or 10%
Deductibility Dividends and DDT not deductible
Same as equity Interest tax deductible
Interest tax deductible
Tax implication in the hands of shareholder at the time of repayment of capital
• Buyback – results in distribution tax of 22.66% on the company; Exemption to shareholder
• Capital reduction – deemed dividend tax to extent of profits and balance taxed as capital gains for shareholder
• Capital Gains tax liability at the time of redemption in the hands of shareholders
• No DDT at the time of redemption if redeemed at issue price
Post conversion to equity – same as for equity
No tax implications on repayment
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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
Repatriation strategies
27
Repatriation strategies
Dividend distribution1
Royalty/ Fee for Technical Services2
Interest3
Share transfer4
Buy back of shares5
Capital reduction6
Various modes of cash repatriation to Parent Company
Imperative to evaluate the tax implications under respective treaties
28
Cash repatriation
Buy BackCapital
ReductionPurchase of asset from
overseas company
• DDT applicable
@ 16.995%
• Tax applicable
on the company
distributing such
dividend
• Tax on
distributed
income @
22.66%
(consideration
less amount
received by
company on
issue of shares)
• Tax applicable
on the company
carrying out such
buyback
• DDT @ 16.995%
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?
2 3 4Dividend
Distribution
1
Distribution tax applicable to the company carrying out buy back
29
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 1.6.2013, 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
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 jurisdiction Buyback 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
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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
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
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
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
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India - UK Vs. India -Singapore
1. Withholding rates for revenue streams – Dividend, Royalty/ FTS, Interest
Treaty CGT Royalty/ FTS Interest
Singapore Only in Singapore 10% 10%-15%
UK Both states 10%-20% 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
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
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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
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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
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
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
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
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
1 Open to dispute2 Based on type of entity and extent of acquisition
Shares Business Assets
Step-up of depreciation
No Yes Yes
Availability of benefit of tax losses
Conditional No – continues in Seller co
No – continues in Seller co
Sales Tax No No Yes
Stamp duty Yes – on shares Yes – subject to evaluation
Yes - subject to evaluation
Case study 5 – Inbound presence via Acquisition
Cross border tax issues
45
Key Challenges
Exit taxes – Capital gains
Incom
e
Characte
risat
ion
Deputation issues
Withholding tax
Taxable presence - PE
Cross border tax
46
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
What investors look for
Country Capital gains – sale of shares
Royalty FTS Interest
Singapore Alienator State 10% 10% 10%/15%
Mauritius Alienator State 15% No article Rate not prescribed
UK Taxable in both States 15%-20% 15%-20% 0%-15%
Netherlands • Taxable in both States on transfer of 10% or more shares to resident
• Taxable in Alienator State in case of corporate reorganization (Subject to holding of at least 10%)
10% 10% 10%
Luxembourg Alienator State 10% 10% 10%
48
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
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 income Contract entered before May 31, 1997
Contract entered on or after May 31, 1997 but
before June 1, 2005
Contract entered on or after June 1, 2005
New rate pursuant to amendment by
Finance Act, 2013
Royalty 30% 20% 10% 25%
FTS 30% 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
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
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
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
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
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
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 material Only copyright is covered
Absence of make available clause Presence of make available clause
Definition Arbitrage
Income Tax Act DTAA
56
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
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
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
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
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
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
Deputation issues – Inbound
63
Characteristics of Secondment
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
Right of Lien on foreign employment
IPR ownership
Economic Employer
64
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
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
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
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
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
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
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
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
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
Service PE
Country Services provided to a non-related enterprise
Services provided to a related enterprise
Australia More than ninety (90) days within any twelve (12) month period
One (1) day
Canada More than ninety (90) days within any twelve (12) month period
One (1) day
Singapore more than ninety (90) days within any fiscal year
More than thirty (30) days in a fiscal year
China More than one hundred and eighty-three (183) days
Not provided
Norway Six (6) months within any twelve (12) month period
Not provided
United Kingdom More than ninety (90) days in a twelve (12) month period
More than thirty (30) days in a twelve (12) month period
United States of America More than ninety (90) days in a twelve (12) month period
One (1) day
74
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)
Verizon US GTE
India
USReimbursement
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..
75
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
76
Indirect transfers
78
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
IndiaKraft – Cadbury takeover deal
Vodafone Wins $2 bn Tax Case in Supreme Court January 20, 2012
Finance Act 2012- India Imposes Tax on indirect transfer of Indian assets May, 2012
The Vodafone Litigation :: The Transaction
79
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
The Transaction
The Vodafone Litigation :: Background
80
2006-2007
• 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
The Vodafone Litigation :: Key Issues & SC Observations
81
Key Issues
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…..
SC Observations
82
Key Issues
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
SC Observations
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
Finance Act Rewrites Legislation Retrospectively :: Taxing Indirect Transfer of Indian Assets
83
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 1962...
‘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 Amendments Key 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
Finance Act Rewrites Legislation Retrospectively :: Taxing Indirect Transfer of Indian Assets
84
Key Amendments Key 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 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`
Clarification Provided by CBDT
Finance Act Rewrites Legislation Retrospectively :: Taxing Indirect Transfer of Indian Assets
85
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?
International Trends
International Trends
87
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….
GAAR Provisions
GAAR – Basic Provisions
89
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 purposesOR 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
Acquisition Tax Issues
Modes of Acquisition
91
Acquisition
Business PurchaseBusiness Purchase
SlumpSale
SlumpSale
ItemizedSale
ItemizedSale
Share Purchase
Share Purchase
Acquisition through the Slump Sale route
92
• 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
Acquisition through the Slump Sale route
93
• 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
A Pvt. Ltd.
Business A Business 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
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
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 share Long Term Capital Asset (>12 months)
Short Term Capital Asset
Equity share of a listed company subject to STT
Exempt 15.45%
Equity Shares of a listed company without payment of STT
20.6%(with indexation) 30.9%
Any other shares 20.6%(with indexation) 30.9%
*Surcharge as applicable
Other Modes of Acquisition
97
Acquisition
Merger Demerger
Acquisition through the merger route
98
• 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
Acquisition through the merger route
99
• 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
Acquisition through the merger route
100
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
Acquisition through the De-merger route
101
• 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
Acquisition through the De-merger route
102
• 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
A Pvt. Ltd.(Demerged Co.)
Business A Business 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
Outbound Investment
Key Questions while going outbound
105
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
Key objectives
106
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
Some Deciding factors
107
Foreign Country RisksExit 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
The ‘tax’ effect
108
Overall effective tax rate of Global Business
33.99 percent
Intermediate Holding Company
Choice of Jurisdiction
Funding Options
Transfer Pricing
IP Holding Company
Appropriate Acquisition Structure
Tax – Pivot to business decisions !
Forms of business presence
Forms of business presence
110
JV
Joint venture company (JVC)
WOS
Greenfield or Acquisition
Branch
Modes of investing overseas
Unincorporated Incorporated
CompanyLiaison Office
Forms of business presence
111
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
Choice of Entity
Structures
Hybrid
Branch
Legal
112
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
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
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
Forms of business presence – a brief comparison
113
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 – NilInterest – 7%
Tax Rate- 15%Dividend – NilInterest – Nil
Tax Rate- 20%Dividend – 5%Interest – 5%
Tax Rate- 25%Dividend – NilInterest – 5%
Tax Rate- 20%Dividend – 10%*Interest – 10%
Tax Rate- 12%Dividend – NilInterest – Nil
Tax Rate- NilDividend – NilInterest – Nil
Tax Rate- 15%Dividend – NilInterest – 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- NilInterest – Nil
Tax Rate- 15%Interest – 15%
UAE to set up a branch in Targets
Indian Company
Taxability of a BranchTaxability of a Company
Use of IHC
Direct Investment from India into Target Co.
115
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
Dir
ect
Inv
estm
ents
Indian Company
Harnessing the benefits of an IHC
116
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
Provisions of DTC
New regulations
GAAR
Direct Tax Code
CFC
PO
EM
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
118
CFC
119
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
CFC tests
120
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
Computation mechanism
121
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 assetsO – Interim Dividends paidP – Losses of Prior yearsQ – No of days Foreign Co was a CFCR - No of days in accounting period
Case Study – Computation of Passive Income
122
Amount in Rs. CroresIllustrative projections
Important to establish active income test for qualifying for CFC exemption
Particulars FY 12 FY 13 FY 14 FY 15 FY 16
Export of Goods to Third party A 1,500 1,650 1,815 1,997 2,196
Passive Income - Dividend/ Interest etc B 100 120 144 187 262
Sales to group concerns C 300 360 1,800 655 983
Total Income 1,900 2,130 3,759 2,839 3,441
Passive Income B+C 400 480 1,944 842 1,245
Passive Income/ Total Income 21.05% 22.54% 51.72% 29.67% 36.18%
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.
POEM
123
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
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)
Deputation issues – Outbound
Why secondment
126
Companies seeking to do business in world markets - can be successful by having its appropriate talent placed globally
Sending employees overseas is a great talent management / retention tool
Number of outbound assignees - increased considerably, mainly fuelled by growth in IT outsourcing
Large number of outbound employees - junior management and technology personnel
Major outbound population – IT, Healthcare, Banking, Retail, etc.
Tax considerations
127
Country-wise evaluation of Permanent Establishment (“PE”) exposure for Indian company resulting from presence of its personnel in various locations
Examination of availability of “tax credit” in India on foreign taxes
Evaluation of contracting model for assignment of personnel to mitigate PE exposure
Transfer pricing legislation
Compliance with tax filing requirements by Indian company based on foreign tax laws
Employer – Employee
128
• 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
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?
Questions?
Questions & Answers
Questions
&
Answers
Thanks