General Anti Avoidance Rules
(‘GAAR’) – Case Studies
Pranav Sayta
21 September 2012
Case studies
Page 2
India Tax Workshop 2012
Case studies
►
Grandfathering/ Impact on existing structures
Case study 1
►
On whom GAAR is to be invoked
Case study 2
►
Right to choose
Case study 3
►
Corresponding relief
Case study 4
►
Corresponding relief
Case study 5
►
SAAR/LOB v/s GAAR
Case study 6
Page 3
General Anti Avoidance Rules (‘GAAR’) Case Studies
Case study 1 – Grandfathering/ Impact on
existing structures
S Co
100%
Singapore
Facts
► S Co is the ultimate parent company
of a Singapore based group and is
an operating company
►
S Co 1
►
100%
N Co
Netherlands
100%
I Co 1
Page 4
India
►
Group has significant business
operations in Singapore
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 issued by the Singapore
Revenue Authorities
General Anti Avoidance Rules (‘GAAR’) Case Studies
Case study 1 – Grandfathering/ Impact on
existing structures
►
S Co
100%
►
Singapore
S Co 1
►
100%
N Co
Netherlands
100%
I Co 1
India
►
S Co 1 has a subsidiary, N Co which
has invested into India
N Co is a tax resident of
Netherlands, holding a tax residency
certificate issued by the Netherlands
Revenue Authorities
N Co holds 100% shares of an
Indian company I Co 1 since
January 2005
Negotiations are in progress with
potential buyers which could result
in:
►
►
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General Anti Avoidance Rules (‘GAAR’) Case Studies
N Co selling the shares of I Co 1 in
FY 2013-14; or
S Co 1 selling the shares of N Co in
FY 2013-14
Case study 1 – Grandfathering/ Impact on
existing structures
Issues for discussion
►
Whether any entity in the structure could be subject to Income-tax in India on
gains from sale of shares of I Co 1?
►
On what grounds could the tax authorities invoke GAAR to assert taxability on
any entity in the structure for gains from sale of shares of I Co 1?
►
What could be the consequences/Income-tax implications in the hands of the
entities in the structure in case GAAR is invoked by the tax authorities?
►
Is there any tax avoidance arising due to the above structure?
►
Whether tax avoidance has to be looked at point of investment or
divestment?
►
Whether there could be any implications for the buyer wherein GAAR is
invoked on the seller?
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General Anti Avoidance Rules (‘GAAR’) Case Studies
Case study 2 – On whom GAAR is to be
invoked
F Hold Co 1
Acquirer Co
Sale of shares
of F Hold Co 2
Facts
►
F Hold Co 1 has a 100 percent
subsidiary, F Hold Co 2
100%
100%
►
F Hold Co 2 has a 100 percent
subsidiary in India, Op Co
F Hold Co 2
F Hold Co 2
►
100%
Op Co has significant carried
forward business losses (tax)
100%
►
F Hold Co 1 sells the shares of F
Hold Co 2 to Acquirer Co in FY
2013-14
Outside India
Inside India
Op Co
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Op Co
General Anti Avoidance Rules (‘GAAR’) Case Studies
Case study 2 – On whom GAAR is to be
invoked
►
F Hold Co 1
Acquirer Co
Sale of shares
of F Hold Co 2
100%
100%
F Hold Co 2
F Hold Co 2
100%
100%
Subsequent to above sale of
shares of F Hold Co 2, Acquirer
Co holds 100 percent shares of F
Hold Co 2 which, in turn, holds
100 percent shares of Op Co
Outside India
Inside India
Op Co
Page 8
Op Co
General Anti Avoidance Rules (‘GAAR’) Case Studies
Case study 2 – On whom GAAR is to be
invoked
Issues for discussion
►
Is there a tax benefit to any of the entities in the given case? And to whom?
►
On what grounds could the tax authorities invoke GAAR in respect of the
above transaction of sale of shares of F Hold Co 2?
►
What would be the impact on set-off of carried forward losses of Op Co?
►
What could be the consequences/ Income-tax implications in case GAAR is
invoked by the tax authorities?
Page 9
General Anti Avoidance Rules (‘GAAR’) Case Studies
Case study 3 – Right to choose?
Facts
Shareholder
(S)
►
Unlisted Indian
company
Page 10
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
General Anti Avoidance Rules (‘GAAR’) Case Studies
Case study 3 – Right to choose?
Issues for discussion
►
Is the taxpayer entitled to exercise a choice so as to mitigate his taxes?
►
On what grounds could the tax authorities invoke GAAR to assert taxability on
S?
►
What could be the consequences/Income-tax implications in the hands of S in
case GAAR is invoked by the tax authorities?
►
In case GAAR is invoked in respect of the present transaction, what would be
the cost of acquisition when the balance 60 shares are sold by S?
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General Anti Avoidance Rules (‘GAAR’) Case Studies
Case study 4 – Corresponding relief
F Co
Outside India
Inside India
100%
100%
A Co
B Co
Facts
► F Co is a foreign company
► F Co has two 100 percent
subsidiaries in India – A Co and B
Co
► During the year, A Co has
divested its shareholding in X Co
to an unrelated party
►
Sale of shares of Y Co
►
100%
X Co
Page 12
100%
Y Co
►
A Co has earned substantial long
term capital gains (on the above)
A Co proposes to sell shares of Y
Co to B Co at fair market value
A Co would incur a substantial
loss (long term) on account of the
above
General Anti Avoidance Rules (‘GAAR’) Case Studies
Case study 4 – Corresponding relief
►
F Co
Outside India
Inside India
100%
100%
A Co
B Co
Sale of shares of Y Co
100%
X Co
Page 13
100%
Y Co
General Anti Avoidance Rules (‘GAAR’) Case Studies
A Co would set-off the long
term capital loss on sale of
shares of Y Co against the long
term capital gains earned on
sale of shares of X Co
Case study 4 – Corresponding relief
Issues for discussion
►
Whether the tax authorities can invoke GAAR on the above transaction of
sale of shares of Y Co?
►
What could be the Income-tax implications in the hands of A Co on the above
transaction of sale of shares of Y Co?
►
What could be the Income-tax implications in the hands of B Co if they were
to divest these shares eventually?
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General Anti Avoidance Rules (‘GAAR’) Case Studies
Case study 5 – Corresponding relief
Facts
UK Co
United Kingdom
100%
N 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
Netherlands
Outside India
Inside India
100%
I Co
Page 15
India
General Anti Avoidance Rules (‘GAAR’) Case Studies
Case study 5 – Corresponding relief
UK Co
►
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 had 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
Netherlands
Outside India
Inside India
100%
I Co
Page 16
India
General Anti Avoidance Rules (‘GAAR’) Case Studies
Case study 5 – Corresponding relief
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
►
Equity – 10
►
Debt – 100 (CCDs of 60 and
ECBs of 40)
Outside India
100%
I Co
Page 17
Inside India
►
I Co requires further funds for
business purposes and has
accordingly, approached N Co
►
I Co would be:
India
►
Issuing additional CCDs on 1 July
2013 of 20
►
Availing ECBs on 1 July 2013 of
10
General Anti Avoidance Rules (‘GAAR’) Case Studies
Case study 5 – Corresponding relief
Issues for consideration
►
What could be the Income-tax implications in the hands of N Co/ I Co/ UK Co
in respect of interest payout by I Co?
►
Whether GAAR could be invoked in respect of past transactions of CCDs and
ECBs?
►
On what grounds could the tax authorities invoke GAAR in respect of CCDs
as well as ECBs inspite interest payout being at arm’s length?
►
In whose hands can GAAR be invoked in respect of CCDs and ECBs?
►
What could be the consequences/ Income-tax implications in the hands of N
Co/ I Co/ UK Co in case GAAR is invoked by the tax authorities?
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General Anti Avoidance Rules (‘GAAR’) Case Studies
Case study 6 – SAAR/LOB v/s GAAR
Facts
►
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 19
I Co is an operating company
General Anti Avoidance Rules (‘GAAR’) Case Studies
Case study 6 – SAAR/ LOB v/s GAAR
100%
►
US Co
100%
USA
►
100%
M Co
Mauritius
India
Page 20
S Hold
Co
Sale of I Co
shares
100%
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
►
S Op
Co
Singapore
►
Outside India
Inside India
►
I Co
General Anti Avoidance Rules (‘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
Case study 6 – SAAR/ LOB v/s GAAR
100%
►
US Co
100%
USA
100%
M Co
Mauritius
Sale of I Co
shares
100%
India
Page 21
S Hold
Co
S Op
Co
►
Singapore
Outside India
►
Inside India
I Co
General Anti Avoidance Rules (‘GAAR’) Case Studies
S Hold Co and S Op Co are
tax residents of Singapore,
holding tax residency
certificates 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
Case study 6 – SAAR/ LOB v/s GAAR
Issues for discussion
►
Whether US Co or M Co or S Hold Co could be subject to Income-tax in India
on gains from sale of shares of I Co?
►
On what grounds could the tax authorities invoke GAAR to assert taxability on
US Co or M Co or S Hold Co for gains from sale of shares of I Co?
►
What would be the cost of acquisition for the transferor in respect of the
transaction of sale of shares in FY 2014-15?
►
Can the intra-group reorganization of December 2012 and subsequent sale of
shares in FY 2014-15 be considered as “pre-ordained” and subject to GAAR?
►
Can the tax authorities invoke GAAR in the above case, even though S Hold
Co meets the “limitation of benefit” test under the India-Singapore tax treaty?
►
What could be the consequences/Income-tax implications in the hands of US
Co/M Co/S Hold Co in case GAAR is invoked by the tax authorities?
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General Anti Avoidance Rules (‘GAAR’) Case Studies
Thank you
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