General Anti Avoidance Rules
(‘GAAR’) - Case Studies
Pranav Sayta
IFA India WRC Conference : July 2012
GAAR : Case studies - Contents
►
Case Study 1 : Inbound Investments from Mauritius
►
Case Study 2 : Intra Group Reorganization
►
Case Study 3 : Singapore based Group
►
Case Study 4 : Private Equity Investment
►
Case Study 5 : Buyback of Shares
►
Case Study 6 : Funding by CCD’s & ECB’s
►
Case Study 7 : Right to Choose?
Page 2
GAAR – Case Studies
Case study 1 – Inbound investment from
Mauritius
►
US Co is a company incorporated in the United States of America (‘USA’) and
a tax resident of USA
►
US Co is a global conglomerate having subsidiaries in various jurisdictions
across the world
►
US Co has set-up 100 percent subsidiary in Mauritius, M Co
►
M Co is a tax resident of Mauritius, holding a tax residency certificate issued
by the Mauritius Revenue Authorities
►
M Co was set-up to act as a holding company for investments into India and
other Asia Pacific countries
►
M Co has two full time employees and has taken office premises on rent in
Mauritius
►
Board meetings of M Co are held in Mauritius once a quarter for taking
business decisions
Page 3
GAAR – Case Studies
Case study 1 – Inbound investment from
Mauritius
►
US Co
USA
M Co has set-up 100 percent
subsidiaries in India, I Co 1 and
I Co 2
►
100%
Mauritius
M Co
100%
I Co 1
Page 4
I Co 2
Overseas
company
GAAR – Case Studies
I Co 1 and I Co 2 are operating
companies
►
This structure has been in place
since the year 2003
►
M Co sells the shares of I Co 1
in Financial Year (‘FY’) 2013-14
Case study 1 – Inbound investment from
Mauritius
Points for discussion
►
Can GAAR be invoked by the tax authorities in the above case?
►
►
Reasons on account of which GAAR can/ cannot be invoked
What are the consequences in case GAAR is invoked by the tax authorities?
Page 5
GAAR – Case Studies
Case study 2 – Intra group reorganization
►
US Co is a company incorporated in USA and a tax resident of USA
►
US Co has a 100 percent subsidiary in Mauritius, M Co
►
M Co is a tax resident of Mauritius, holding a tax residency certificate issued
by the Mauritius Revenue Authorities
►
M Co has a 100 percent subsidiary in India, I Co
►
Page 6
I Co is an operating company
GAAR – Case Studies
Case study 2 – Intra group reorganization
US Co
►
100%
USA
100%
S Hold Co
M Co
Mauritius
100%
Sale of I Co
shares
Singapore
Page 7
GAAR – Case Studies
►
M Co had purchased the shares for Rs
10 in the year 2002
►
M Co sells the shares in December
2012 for Rs 100
►
S Hold Co is also a 100 percent
subsidiary of US Co and is set-up to
act as a holding company for Asia
Pacific region
►
Group has its regional headquarter in
Singapore and also has significant
operations in Singapore through S Op
Co
I Co
India
As part of the group reorganization, M
Co sells shares of I Co to S Hold Co, a
Singapore company in December
2012 at fair market value
Case study 2 – Intra group reorganization
US Co
100%
►
S Hold Co and S Op Co are tax
residents of Singapore, holding a tax
residency certificate issued by the
Singapore Revenue Authorities
►
S Hold Co’s expenditure in the
previous 2 years have been USD
225,000 per annum
►
S Hold Co sells the shares of I Co in
FY 2014-15
USA
100%
S Hold Co
M Co
Mauritius
Sale of I Co
shares
Singapore
100%
I Co
India
Page 8
GAAR – Case Studies
Case study 2 – Intra group reorganization
Points for discussion
►
Can GAAR be invoked by the tax authorities in the above case?
►
►
Reasons on account of which GAAR can/ cannot be invoked
What are the consequences in case GAAR is invoked by the tax authorities?
Page 9
GAAR – Case Studies
Case study 3 – Singapore based group
►
S Co
►
100%
S Co 1
100%
Outside India
S Co 1 is the group’s holding company
for overseas business interests
►
S Co and S Co 1 are tax residents of
Singapore holding a tax residency
certificate (TRC) issued by the
Singapore Revenue Authorities
►
S Co 1 has a subsidiary, M Co which
has invested into India
►
M Co is a tax resident of Mauritius,
holding a TRC issued by the Mauritius
Revenue Authorities
►
M Co holds 100% shares of an Indian
company I Co
Inside India
I Co
Page 10
GAAR – Case Studies
Group has significant business
operations in Singapore
►
M Co
100%
S Co is the ultimate parent company of
a Singapore based group and is an
operating company
Case study 3 – Singapore based group
►
S Co
100%
S Co 1
100%
M Co
Outside India
100%
Inside India
I Co
Page 11
GAAR – Case Studies
Negotiations are in progress with
potential buyers which could result in:
►
M Co selling the shares of I Co in FY
2013-14; or
►
S Co 1 selling the shares of M Co in
FY 2013-14
Case study 3 – Singapore based group
Points for discussion
►
Can GAAR be invoked by the tax authorities in the above case?
►
►
Reasons on account of which GAAR can/ cannot be invoked
What are the consequences in case GAAR is invoked by the tax authorities?
Page 12
GAAR – Case Studies
Case study 4 – Private Equity Investment
Investor
1
Investor
2
Investor
3
M Co
►
US based fund manager launches a
Private Equity (PE) fund to raise
capital from foreign investors for
investment in India. The investors
could be in various different
jurisdictions.
►
Due to regulatory reasons and
commercial considerations, the
foreign investors cannot individually
invest directly into the Indian
companies (I Cos)
►
The fund manager has set-up an
offshore vehicle, M Co, for pooling
funds & investment into I Cos
►
M Co is a tax resident of Mauritius,
holding a tax residency certificate
issued by the Mauritius Revenue
Authorities
Outside India
Inside India
I Cos
Page 13
GAAR – Case Studies
Case study 4 – Private Equity Investment
Investor
1
Investor
2
►
M Co has engaged a US based
fund manager as its investment
manager
►
The fund manager in turn has
engaged an Indian company to act
as an investment advisor in India
►
All investment decisions are taken
in the board meetings of M Co
chaired from/held in Mauritius after
considering the recommendations
of US based fund manager
►
Board of directors of M Co
comprises representatives from
US based fund manager, a couple
of Mauritius residents and some
independent (non Indian) directors
►
M Co is likely to earn Capital
Gains on sale of shares of I Cos
Investor
3
M Co
Outside India
Inside India
I Cos
Page 14
GAAR – Case Studies
Case study 4 – Private Equity Investment
Points for discussion
►
Can GAAR be invoked by the tax authorities in the above case?
►
►
Reasons on account of which GAAR can/ cannot be invoked
What are the consequences in case GAAR is invoked by the tax authorities?
Page 15
GAAR – Case Studies
Case study 5 – Buyback of shares
►
US Co is a tax resident of USA and
has invested into India through a
subsidiary, M Co
►
M Co is a tax resident of Mauritius,
holding a tax residency certificate
issued by the Mauritius Revenue
Authorities
►
M Co holds 90 percent of the shares
of company in India, I Co and
balance 10 percent is held by
unrelated parties
►
I Co has been paying 10 percent
dividend regularly for last several
years
►
I Co has significant accumulated
profits
US Co
100%
Unrelated
parties
M Co
90%
Outside India
Inside India
Unrelated
parties
Page 16
10%
I Co
GAAR – Case Studies
Case study 5 – Buyback of shares
►
US Co
100%
Unrelated
parties
Outside India
Inside India
Page 17
10%
►
Idle cash is available with I Co
►
There is a lack of good/convincing
opportunities available for investment
of idle cash
►
Buy-back seems a worthwhile option
as per current share valuation (i.e
currently, shares of I Co are valued at
less than their potential)
M Co
90%
Unrelated
parties
Board of directors of I Co believes
inter alia :
I Co
GAAR – Case Studies
►
While it is uncertain whether or not in
the buy-back offer shares will be
tendered by the unrelated parties, M
Co is likely to tender shares in the
buy-back offer
Case study 5 – Buyback of shares
Points for discussion
►
Can GAAR be invoked by the tax authorities in the above case?
►
►
Reasons on account of which GAAR can/ cannot be invoked
What are the consequences in case GAAR is invoked by the tax authorities?
Page 18
GAAR – Case Studies
Case study 6 – Funding by Compulsorily Convertible Debentures
(‘CCDs’) and External Commercial Borrowings (‘ECBs’)
UK Co
►
UK Co is a company incorporated in
UK
►
UK Co is a tax resident of UK,
holding a tax residency certificate
issued by the UK Revenue
Authorities
►
UK Co has a 100 percent subsidiary
in Netherlands, N Co
►
N Co is a tax resident of
Netherlands, holding a tax
residency certificate issued by the
Netherlands Revenue Authorities
►
N Co has a 100 percent subsidiary
in India, I Co
United Kingdom
100%
N Co
Netherlands
100%
I Co
Page 19
India
GAAR – Case Studies
Case study 6 – Funding by CCDs/ ECBs
UK Co
Netherlands
100%
I Co
Page 20
I Co had issued CCDs to N Co at a
coupon rate of 10 percent
►
CCDs were issued on 1 January 2010
►
CCDs are compulsorily convertible into
equity shares of I Co on 31 December
2019
►
I Co has also borrowed (ECBs) on 1
January 2009 from N Co, repayable on
31 December 2013
►
I Co has been paying and will continue
to pay interest on 31 December every
year in respect of the ECBs and the
CCDs (assume that the interest rate is
at arms length & is compliant with
exchange control regulations)
United Kingdom
100%
N Co
►
India
GAAR – Case Studies
Case study 6 – Funding by CCDs/ ECBs
UK Co
Interest is claimed as an expense
deduction and is also subjected to
withholding tax
►
Capital structure of I Co is as follows:
United Kingdom
100%
N Co
►
Netherlands
Page 21
India
GAAR – Case Studies
Equity – 10
►
Debt – 100 (CCDs of 60 and ECBs of
40)
►
I Co requires further funds for
business purposes and has
accordingly, approached N Co
►
I Co would be:
100%
I Co
►
►
issuing additional CCDs on 1 July 2013
of 20
►
Availing ECBs of 10 on 1 July 2013
Case study 6 – Funding by CCDs/ ECBs
Points for discussion
►
Can GAAR be invoked by the tax authorities in the above case?
►
►
Reasons on account of which GAAR can/ cannot be invoked
What are the consequences in case GAAR is invoked by the tax authorities?
Page 22
GAAR – Case Studies
Case study 7 – Right to choose?
►
Shareholder
(S)
Unlisted Indian
company
Page 23
S has acquired shares in an unlisted Indian
company as follows:
Year
Particulars
No of
shares
Cost
per
share
(in Rs)
2007
Purchase
25
10
2009
Bonus
25
-
2010
Rights
50
100
►
Above shares in unlisted Indian company are
held in dematerialized form in a demat account
►
S is contemplating sale of 40 shares
►
S transfers 50 shares from the above demat
account 1, into a new demat account 2
►
S thereafter sells 40 shares for Rs 125 per share
& transfers/delivers 40 shares to the buyer’s
demat account from his old demat account 1
GAAR – Case Studies
Case study 7 – Right to choose?
Points for discussion
►
How will the Capital Gains of S be computed?
►
Can GAAR be invoked by the tax authorities in the above case?
►
►
Reasons on account of which GAAR can/ cannot be invoked
What are the consequences in case GAAR is invoked by the tax authorities?
Page 24
GAAR – Case Studies
Case study 7 – Right to choose?
Points for discussion :
Is a Taxpayer entitled to exercise a choice so as to mitigate his taxes? For eg:
►
Choosing to do a Slump sale or an Itemised sale or a Demerger plus share
sale
►
Choosing to sell shares of a WOS (wholly owned subsidiary) or the WOS
selling the business
►
Choosing to do business in the form of an LLP or a Company
►
Having earned a Capital Gain, selling an asset whose value has dropped, in
order to obtain set off of resulting loss
►
Etc, ….
Page 25
GAAR – Case Studies
Thank You