Presentation on tax issues – Inbound & Outbound
December, 2013
0
Agenda
1
Setting the context
2
Key Challenges
3
Key Considerations for inbound investments
4
Forms of business presence for foreign companies
5
Capital structuring
6
Cross border tax issues
1
Agenda…. (Contd.)
7
Indirect transfer of shares
8
Acquisition tax issues
9
Key considerations for outbound investments
10
Forms of business presence overseas
11
Use of International holding company
12
Proposed Direct Tax Code - Impact on outbound
investments
2
Setting the Context
Setting the Context… the Indian tax climate
 Introduction of GAAR
provisions –
substance over form
 Retrospective
amendments – uncertainty
on investment structure
 Proposed CFC
Regulations – planning
future investments?
 Tax on indirect
transfer – ambiguity in
provisions
 Transfer pricing
legislations/ litigations –
impact on structures
 Eligibility to Treaty
benefits and unilateral
treaty override
Dynamic and evolving tax environment to impact present and future investment cycle
4
Key Challenges
Key Challenges
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
6
Key Challenges
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
7
Key considerations –
planning inbound
investments
Key considerations
Factors impacting decision making
Political
Cultural
Economic
Legal
Financial
Technology
System
Diversity
Resources
Corporate
Laws
Fund
availability
Stability
Ethics
Purchasing
power
Regulations
Investor value
Philosophy
Religion
Exchange
rates
Judiciary
System
Banking
System
Risk
Social
System
Demographics
Growth rate
Savings
Tax Laws
Labour Laws
Environment
Capital formation
9
Inbound investment life cycle
Getting
Started
• Entry Strategy
– Appropriate
jurisdiction
planning
– Eligibility to claim
tax treaty benefits
• Available Entry
Routes – FDI, FII,
FVCI
• Time Frame
• Regulatory Outlook
Structuring
• 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
Repatriation
• Commercial objectives
• Modes of Repatriation
– Periodic/ steady cash
flows – Dividends,
Interest
– Periodic/ selective buyback
– Growth capital with
bullet payment at the
end of the investment
horizon
• Planning tax efficiency
• Timing
• Income
Exit
Grooming
• Exit options
– Floatation
– Buy-back
– Secondary market/
trade sale
• Pricing
• Planning tax efficiency
• Regulatory
implications
characterization – a
critical determinant
10
Questions to be answered?
Form of entity to be established – business
presence in India?
Form of Instrument in which investment to be
made – Equity, Debt, Preferred 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
11
Key Challenges
Maximising shareholder value
Minimising global tax costs
Alignment with investor objectives
Ease in intra-group funds flow
Considerations for fundraising
Determination of efficient intermediate jurisdictions
for positioning of SPVs
Compliance with tax, regulatory and legal
framework in India and in the relevant host country
12
Forms of business
presence
Forms of business presence
Entity options
Wholly owned subsidiary
Joint Venture
Branch Office /
Project Office
Liaison Office
Other Options
Technology Transfer & Licensing
Agreement
Services Agreement
14
Forms of business presence
Unincorporated entities
Incorporated entities
Particulars
Liaison Office
Project Office
Branch Office
Wholly owned subsidiary/
Joint Venture
Activities
Representation/
communication
only
Execution of
specific projects
Specified
permissible
activities
Automatic/ prior approval
route
Taxation
Generally a nontaxable presence
43.26%
43.26%
33.99% plus DDT 16.995%
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
15
Forms of business presence – a comparison
Project Office
Branch Office
Wholly owned subsidiary/
Joint Venture
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
Extension of the Parent
Extension of the
Parent
Extension of the
Parent
Separate legal entity
Taxable
presence
Does not per se result
in taxable presence
Taxable presence
Taxable presence
Taxed as an independent
legal entity
Tax rates
NA - Purpose is not
income earning
Rates 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
No requirement of filing tax
clearance certificate as tax
arrears are recovered on
winding up
Particulars
Purpose
Legal form
Liaison Office
Required to file tax
clearance certificate
16
Case Study 1 – Form of business presence
F Co. (UK)
Exports
finished goods
F Co. is an exporter of finished
goods. Contracts executed in home
country
Requires temporary space for
executing marketing activities in
exporting countries
India
China
Sri Lanka
Ideal form of business presence? – Establishment of Liaison Office
17
Capital structuring
Funding instruments
A
Equity Shares – same class or different classes of shares
B
Compulsorily Convertible Preference Shares (‘CCPS’)
C
Compulsorily Convertible Debentures (‘CCDs’)
D
External Commercial Borrowings (‘ECB’)
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
19
Funding instruments
Impact of
Financials
Companies
Act, 1956
KEY PARAMETERS
Income Tax
Act, 1961
Stamp Duty
FEMA
20
Funding instruments
Debt Instruments
Equity Instruments
Equity Shares
Withdrawal of
funds
End-use
restrictions
Generally not
possible during
company’s lifespan
None
Compulsorily
Convertible
Preference
Shares (‘CCPS’)
Cannot be
redeemed prior to
conversion
None
Compulsorily
Fully Convertible
Debentures
(‘FCD’)
External
Commercial
Borrowings (‘ECB’)
Cannot be
redeemed prior to
conversion
Minimum average
maturity period
prescribed
None
Generally permitted for
capex purposes in real/
industrial/
infrastructure sector.
Not permitted for
working capital etc.
21
Funding instruments - Comparison
Parameters
Equity
CCPS
CCD
(Quasi-debt)
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
Interest received be
taxable
Non tax deductible
• Interest allowed as
deduction (arm’s
length- as per
transfer pricing
principle)
Deductibility of
cost of raising
capital
Non tax deductible
ECB
• Dividend received
post conversion to
equity will have same
treatment as for an
equity instrument
Interest allowed as
deduction (arm’s
length- as per transfer
pricing principle)
• Dividend not
deductible
22
Funding instruments
Parameters
Tax rate
Equity
• DDT payable @
16.995% by
distributing company
on the amount of
dividends
CCPS
Same as for equity
CCD
(Quasi-debt)
Interest – as per
treaty rates
ECB
Interest – as per
treaty rates or 10%
Dividend post
conversion - same as
equity
• Not taxable in the
hands of shareholders
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 Gains tax
liability at the time
of redemption in
the hands of
shareholders
Post conversion to
equity – same as for
equity
No tax implications on
repayment
• Capital reduction –
deemed dividend tax
to extent of profits and
balance taxed as
capital gains for
shareholder
• No DDT at the time
of redemption if
redeemed at issue
price
23
Case Study 2 – Funding through Convertible Debentures
F Co.
Interest paid on
CCDs
F Co. to infuse funds in form of CCDs in I
Co.
Infusion of funds
through CCDs
Can excessive use of CCDs as part of
capital structure come under GAAR
scrutiny
Overseas
India
I Co.
Denial of interest benefit to I Co. on re-characterization of debt to equity ?
24
Repatriation strategies
Repatriation strategies
Various modes of cash repatriation to Parent Company
1
Dividend distribution
4
Share transfer
2
Royalty/ Fee for Technical Services
5
Buy back of shares
3
Interest
6
Capital reduction
Imperative to evaluate the tax implications under respective treaties
26
Cash repatriation
1
Dividend
Distribution
• DDT applicable
3
2
Buy Back
• Tax on
Capital
Reduction
• DDT @ 16.995%
4
Purchase of asset from
overseas company
• Could be tax
@ 16.995%
distributed
to the extent of
efficient subject to
• Tax applicable
income @
accumulated
eligibility of treaty
on the company
22.66%
profits / Capital
benefits (e.g. –
distributing such
(consideration
gains tax
sale of shares by a
dividend
less amount
as per applicable
Singapore tax
received by
rates
resident company)
company on
issue of shares)
• Tax applicable on
• Requires
• Feasibility from a
sanction of the
commercial
High Court
perspective will
the company
need to be
carrying out such
evaluated?
Distribution tax applicable to the company carrying out buy back
buyback
■
27
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
28
Case Study 3 – Buyback of shares from a treaty country
F Co.
IHC to buyback its shares from I Co.
Overseas
Intermediate Holding
Company (IHC)
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
Favorable tax jurisdiction
India
However capital gain will be taxable in India
in case of buyback of shares from a non
treaty country
I Co.
Distribution tax applicable on buyback – Finance Act 2013
29
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
30
Case study 4 – Inbound lifecycle
Step 1 – Deciding the form of presence to be established in India
UK Co.
UK Co.
Overseas
Overseas
India
India
JV Partner
Indian Co.
Setting up a presence in the form of a
subsidiary
JV Partner
LLP
Setting up a presence in the form of a
LLP, which would be subject to approvals
31
Case study 4 – Inbound lifecycle
Step 2 – Funding the Indian Co. viz. capital structure
 Deciding the capital structure (%) between
the Foreign and Indian partner – Equity Vs.
Convertible
UK Co.
 Returns expected – Dividend Vs. Interest
Overseas
 Deductibility for Indian Co.
India
y%
JV Partner
 Transfer pricing the interest payments
 Structuring further funding requirements
X%
and Target shareholding between partners
 Valuations on exit - FDI Vs. Tax
Indian Co.
•
Max is DCF
•
Min is BNW
32
Case study 4 – Inbound lifecycle
Step 3 – Deciding the need for an intermediate jurisdiction
UK Co.
UK Co.
Overseas
India
Singapore
Overseas
India
Indian Co.
UK directly investing into Indian Co.
Indian Co.
UK investing via Singapore
33
Case study 4 – Inbound lifecycle
 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%
 Taxability under local laws
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
34
Case study 4 – Inbound lifecycle
Step 4– Repatriation and exit taxes
UK Co.
UK Co.
Overseas
India
Singapore
Overseas
India
Indian Co.
Stake sale by UK Vs. buy back
Indian Co.
Stake sale by Singapore Vs. buy back
35
Case study 5 – Inbound presence via Acquisition
Transaction – Acquisition of shares Vs. business
•
Acquirer purchases shares from
existing shareholders
•
Consideration flows directly to
shareholder
Consideration
Shareholder
Acquirer
Transfer of shares
Shares
Indian company
36
Case study 5 – Inbound presence via Acquisition
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
37
Case study 5 – Inbound presence via Acquisition
Transaction – Acquisition of shares Vs. business
Shareholder
Indian company
Acquirer
New Company
Transfer of business
under slump sale
•
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
Consideration
38
Case study 5 – Inbound presence via Acquisition
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
39
Case study 5 – Inbound presence via Acquisition
Transaction – Acquisition of shares Vs. business
Shareholder
Indian company
Acquirer
•
Instead of acquiring the
operations (lock, stock and
barrel), the acquirer purchases
specific assets/ liabilities
New Company
Transfer of assets & liabilities
Consideration
40
Case study 5 – Inbound presence via Acquisition
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
41
Case study 5 – Inbound presence via Acquisition
Step-up of
depreciation
Availability of benefit
of tax losses
Sales Tax
Stamp duty
Shares
Business
Assets
No
Yes
Yes
Conditional
No – continues in
Seller co
No – continues in
Seller co
No
No
Yes
Yes – on shares
Yes – subject to
evaluation
Yes - subject to
evaluation
1
Open to dispute
2
Based on type of entity and extent of acquisition
42
Cross border tax
issues
Key Challenges
Cross border tax
Deputation
issues
44
Tax treaty network

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?
45
What investors look for
Capital gains – sale of shares
Royalty
FTS
Interest
Singapore
Alienator State
10%
10%
10%/15%
Mauritius
Alienator State
15%
No article
Rate not prescribed
Taxable in both States
15%-20%
15%-20%
0%-15%
10%
10%
10%
10%
10%
10%
Country
UK
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%)
Luxembourg
Alienator State
46
Royalty & FTS
No
DTAA need not
be applied
Taxable under
the Act?
Yes
Opt for DTAA if more
beneficial
Taxable under
DTAA
Opt for Act if more
beneficial
Analyze DTAA
Not taxable
under DTAA
47
Royalty rates as per domestic tax laws
Enhanced withholding tax rate of Royalty and FTS payments (Finance Act, 2013)

Under existing provisions of Section 115A, rate of deduction of tax at source for royalty and Fee for
Technical Services (‘FTS’) were based on the date of contract;

Section 115A of the Act has been amended by the Finance Act, 2013 to enhance the rate of deduction of
tax at source;
Nature of 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
48
Royalty & FTS
Resident State
Primary right to tax with the country of
residence
Source State
Most treaties provide the country of source to levy tax up to a
maximum level on a gross basis
PE in source state
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)
49
Royalty & FTS
Right of the states to tax
•
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.
50
Royalty & FTS
Article 12 - Royalties and fees for technical services
•
•
‘Royalties’ is typically defined to mean payments of any kind received as a consideration for use
of or right to use:
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)
51
Royalty & FTS
Act or DTAA whichever is more beneficial
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
52
Royalty & FTS
Rate Arbitrage
o
Income Tax Act
o
DTAA
40% on net basis, if PE
exists
40% on net basis, if PE
exists
25% on gross basis
Rate as applicable
53
Royalty & FTS
Definition Arbitrage
Income Tax Act
DTAA
Transfer of all rights
Only use of or right to use is covered
Patent, invention, model, design, secret
formula, or process or trade mark or
similar property
or similar property is not used
Copyright or copyrighted material
Only copyright is covered
Absence of make available clause
Presence of make available clause
54
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
55
Case Study – FTS in case of treaty country
I Co. is engaged in business of
prospecting and mining of minerals
F Co.
Payment of
consideration
Rendering of
technical services
Singapore
India
Extraction of
minerals
I Co. enters into agreement with F Co. for
providing geophysical data for
extracting minerals
However, no technical expertise/ skills
rendered by F Co. to attract tax liability
(CIT vs. De Beers India Minerals Pvt.
Ltd.)
I Co.
‘Make Available’ should enable the person acquiring the service to apply the technology contained
therein – India Singapore DTAA
56
Case Study – Transfer of software (a copyrighted article)
Indian branch office of F Co. licensed the
customized software's to the Indian
customers
F Co.
Revenue taxed the payment received from
customers as royalty
Import of software
package as floppy/
CD
US
India
Branch Office
Payment
Customers
Court observed that license was nonexclusive 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)
Granting of copyright is in nature of royalty vis-à-vis transfer of copyrighted article is in nature of
sale
57
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
58
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
59
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
60
Deputation issues –
Inbound
Characteristics of Secondment
Obligation to complete
• Warranty for quality of work
• Service arrangement
• Add cost to complete
unfinished work
Supervision, Control,
Direction, Authority to
instruct, Review
Right, Responsibility, Risk,
Rewards
Power to disqualify, replacement
and recall
Commercial justification:
• Specific or general
• Qualification of Secondee
IPR ownership
Cost or mark-up
Right of Lien on foreign
employment
Economic Employer
62
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
63
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
64
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
65
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
66
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 costto-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.
67
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.
68
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
69
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?
70
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)
71
Service PE
Country
Services provided to a nonrelated 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 eightythree (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
72
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)
73
Case Study- Verizon Data Services
Background
 Verizon India is a wholly owned subsidiary of Verizon Data Services
Verizon US
GTE
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
US
India
Personnel
Reimbursement
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.
Verizon (India)
 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
Case Study - Verizon Data Services (contd.)
Ruling

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.
75
Indirect transfers
Indirect Transfers
• India makes retrospective changes to the
law that would effectively reverse the
decision of the Supreme Court in the
Vodafone case
Supreme Court held that Indian Tax authorities
have no basis to tax the sale of indirect
interests held in the Indian Company
Major Transactions impacted by such
retrospective amendments
• 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
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
Kraft – Cadbury takeover deal
Dampened
Enthusiasm for
International
Investment in
India
• 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 nonresident in India
77
The Vodafone Litigation :: The Transaction
HTIL (Cayman
Islands)
Vodafone (VIH B.V)
Netherlands
The Transaction
SPA for sale of
shares of CGP
HTI (BVI) Hldgs
(BVI)
International
Holding
Company
CGP (Cayman
Islands)
3 GSPL
(Mauritius)
(Indirect)
Mauritius Cos.
(Indirect)
Option to
acquire
15.03%
51.96%
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
HEL, India
78
The Vodafone Litigation :: Background
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
79
The Vodafone Litigation :: Key Issues & SC Observations
Presently, indirect transfer of an asset in India is not Taxable under the Income Tax Act
Key Issues
Whether any source of Income or Capital
Asset said to be situated in India?
SC Observations
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
Whether transfer of rights is incidental to a
share transfer and only the situs of such
shares should prevail?
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…..
80
The Vodafone Litigation :: Key Issues & SC Observations
Key Issues
SC Observations
Whether the sale of CGP share can be said
to be a transaction which was designed to
avoid tax in India?
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
Does section 195 have extra territorial
jurisdiction?
Applies only to payments made from a resident to a non-resident
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
Supreme Court ruled that the transaction was structurally valid and the tax
authorities in India had no jurisdiction to tax such an overseas transaction
81
Finance Act Rewrites Legislation Retrospectively :: Taxing
Indirect Transfer of Indian Assets
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...
Key Amendments
Key Impact
‘Capital Asset’ to include management &
control rights
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
‘Transfer’ to include parting with or creation
of right, notwithstanding that such transfer
flows from transfer of shares of an offshore
entity
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
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
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 nonresident
82
Finance Act Rewrites Legislation Retrospectively :: Taxing
Indirect Transfer of Indian Assets
Key Amendments
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
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.
This amendment could enable the tax authorities to reopen cases
for the aforesaid extended period.
Clarification Provided by CBDT
 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`
83
Finance Act Rewrites Legislation Retrospectively :: Taxing
Indirect Transfer of Indian Assets
Clarifications Required……
 No threshold defined to determine what constitutes “substantial” with regards to taxing offshore transfers with
substantial asset base in 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?
84
International Trends
International Trends
China modified its tax code to tax “Indirect Transfers” of
local companies and assets....(2008)
US
Taxing
Indirect
Transfers
• A non-resident entity that transfers shares of another nonresident 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
PERU
SOUTH
KOREA
Indonesia, Mexico etc….
• 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 nonresident entity could be disregarded for tax purposes in order
to tax the capital gain of the non-resident transferor
Chinese Tax authorities received $25 mn
capital gains tax payment resulting from an
indirect stock transfer, in 2010….
86
GAAR Provisions
GAAR – Basic Provisions
Main purpose or one of the main purposes is to obtain a tax benefit
AND
Not at
arm’s-length
OR
Misuse/abuse of tax
provisions
OR
Lacks commercial
substance
OR
Not for bona-fide
purposes
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.
88
Acquisition Tax
Issues
Modes of Acquisition
Acquisition
Business
Purchase
Slump
Sale
Share
Purchase
Itemized
Sale
90
Acquisition through the Slump Sale route
Meaning
• 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.
Tests to Satisfy
• Business sold as a whole on a going concern
• Documents not to indicate item-wise value of the assets transferred
Others
• 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
91
Acquisition through the Slump Sale route
Computation Mechanism ~ Capital Gains
• Capital gains = Slump Price – Networth of the transferred undertaking
Computation Mechanism ~ Net Worth
• 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
92
Acquisition through the Slump Sale route
• Undertaking
A Pvt. Ltd.
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
Business A
Business B
o Whether to be considered as zero?
• Carry forward of losses
o Whether the losses pertaining to the undertaking can be
transferred?
Slump sale
• Section 50B v/s Section 50C
B Pvt. Ltd.
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?
93
Acquisition through Itemised Sale
Meaning
• Sale of assets & liabilities with values assigned separately for each item of assets and liabilities
Tax Implications
• 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
Others
• 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
94
Acquisition through Share Purchase
Seller Perspective
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%
Acquirer
Consideration
shares
*Surcharge as applicable
Target
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 carryforward benefits
95
Other Modes of Acquisition
Acquisition
Merger
Demerger
96
Acquisition through the merger route
Meaning
• Merger of one or more companies into another
• Merger of two or more companies to form a new company
Prescribed Conditions
• 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)
Cost of Acquisition & period of holding
• 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
97
Acquisition through the merger route
Depreciation
• 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
Implications
• 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‟)
98
Acquisition through the merger route
Mat Credit
~ Rs. 10 cr
Loss of
Rs. 10 cr
A Pvt. Ltd.
A Pvt. Ltd.
A Pvt. Ltd.
Tax holiday
under S. 80IA
Merger
100%
B Pvt. Ltd.
Merger
Merger
B Pvt. Ltd.
B Pvt. Ltd.
Merger of B Ltd. Into its holding
Merger of A Ltd. Into B Ltd.
Merger of A Ltd. Into B Ltd.
company A Ltd.
• Carry forward of losses ~ s. 72A
• Whether B Ltd. can utilise MAT
• No issue of shares on merger
• Whether qualifies the test on s.
vs. s.79 – Which section to apply?
credit of A Ltd.?
• Continuity of Tax holiday?
2(1B)
Impossibility of performance of
conditions
99
Acquisition through the De-merger route
Meaning
• 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
Prescribed Conditions
• 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
Cost of Acquisition & period of holding
• 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
100
Acquisition through the De-merger route
Depreciation
• 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
• Losses - Available to the resulting company
o Directly relatable to undertaking being transferred
o Not directly relatable –proportionate to the assets transferred
101
Acquisition through the De-merger route
• Undertaking
A Pvt. Ltd.
(Demerged Co.)
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
Business A
Business B
o Can the resulting company issue preference shares as
consideration for demerger?
• Continuity of benefits of tax holiday
Demerger
o Whether the tax benefits availed by A Ltd. in respect of
B Pvt. Ltd.
(Resulting Co.)
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?
102
Outbound
Investment
Key Questions while going outbound
How much can
I invest
overseas
How can I reduce
the effective tax
rate
What are the
regulations in
the host country
How to
optimize exit
What should be my
global tax
structuring approach
How do I reduce
burden arising from
repatriation of funds
Where should I
source acquisition
finance from
Should the IP be
migrated to a tax
efficient jurisdiction
104
Key objectives

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
105
Some Deciding factors
Foreign Country Risks
 Complex tax environment in U.S./
Exit Tax Planning
 Entity structuring
Key Considerations
Europe
 Structuring International acquisition

Foreign Exchange regulations
 International holding purposes

Mode of investing
 Post acquisition structuring
India Considerations
Global Transfer Pricing
 Increase in inter company transactions as
Indian company acquire foreign companies

 India regulatory aspect
 Achieving tax efficient circulation of cash within
foreign structure
TP documentation requirement
 Multi jurisdiction documentation compliance
required
 Repatriation planning for mitigating India tax cost

Foreign tax credit issues
106
The ‘tax’ effect
33.99 percent
Overall effective tax rate of Global
Business
Appropriate Acquisition Structure

Intermediate Holding Company

Choice of Jurisdiction

Funding Options

Transfer Pricing

IP Holding Company
Tax – Pivot to business decisions !
107
Forms of business
presence
Forms of business presence
Modes of investing overseas
Unincorporated
Branch
Incorporated
Liaison Office
Company
WOS
JV
Joint venture
company (JVC)
Greenfield or Acquisition
109
Forms of business presence

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
110
Forms of business presence – a brief comparison
Branch Office

Generally gives rise to taxable presence in foreign country

Double Taxation Avoidance Agreement (DTAA) to
Corporation

incorporations
determine the existence of Permanent Establishment (PE)

in foreign country

Losses can be consolidated but inability to defer India tax

Income attribution issues
Taxed in accordance with domestic laws of the country of
Some countries prescribe different tax rates for Global
business companies
Limited Liability Companies (LLC)
Partnership

Taxability of partnership firm under the domestic tax laws
vis-à-vis taxability of partner share

Entitled to same tax and limited liability benefits as a
Corporation
Trust
Limited Liability Partnership

Treated as a normal partnership for tax purposes.

Taxability of partnership firm vis-à-vis partner share

Taxability of trust varies according to the governing domestic
tax laws

Generally, income of trust bears tax in the hands trustees
111
Case Study – Forms of business presence
Taxability of a Branch
Taxability of a Company
Indian Company
Indian Company
India
India
Outside India
Outside India
UAE IHC
UAE IHC
UAE to set up a branch
in Targets
UAE to set up company
in the Targets
Qatar
Tax Rate- 10%
Dividend – Nil
Interest – 7%
Turkey
Tax Rate- 20%
Dividend – 10%*
Interest – 10%
Kuwait
Tax Rate- 15%
Dividend – Nil
Interest – Nil
Oman
Tax Rate- 12%
Dividend – Nil
Interest – Nil
Saudi
Iran
Tax Rate- 20%
Dividend – 5%
Interest – 5%
Tax Rate- 25%
Dividend – Nil
Interest – 5%
Bahrain
Iraq
Tax Rate- Nil
Dividend – Nil
Interest – Nil
Tax Rate- 15%
Dividend – Nil
Interest – 15%
Qatar
Tax Rate- 10%
Interest – 7%
Turkey
Tax Rate- 20%
Interest – 10%
Branch profit- 15%
Kuwait
Tax Rate- 15%
Interest – Nil
Oman
Tax Rate- 12%
Interest – Nil
Saudi
Iran
Tax Rate- 20%
Interest – 5%
Branch profit- 5%
Tax Rate- 25%
Interest – 5%
Bahrain
Iraq
Tax Rate- Nil
Interest – Nil
Tax Rate- 15%
Interest – 15%
112
Use of IHC
Direct Investment from India into Target Co.
Indian Company
Direct Investments

India
 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
Target country
EPS/market capitalization of Indian Co.

Subsidiary
114
Harnessing the benefits of an IHC
Indian Company

 Flexibility to up-stream returns
 Possibility of reducing withholdings on
India
paybacks
Investment
International Holding
Company

Jurisdiction of intermediate
company
 Minimise tax incidence on exit
 Deduction of funding costs at IHC level
 Enhanced ability to leverage on group
strength
 Minimise overall group tax rate
Target country
Investment

Subsidiary
115
Provisions of DTC
New regulations
General Anti-Avoidance Rules (“GAAR’)
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
Direct Tax Code
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
CFC
Introduction of CFC provisions
 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
Residency test for foreign companies
 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
Imperative to evaluate impact of CFC on outbound structure
118
CFC tests
Conditions for qualifying as CFC
Indian Company
Control
India
• Direct or indirect control by Indian residents, i.e. 50% or
more voting power, or Application of 50% or more of income
Outside India
or asset for its benefit or dominant influence in decisive in
shareholders meeting.
Low tax territory:
Trading cum
Holding Company
• Taxes paid in a Foreign country < 50% of taxes payable in
CFC
India.
Residency:
Passive Income Dividend, Interest,
Royalty, sale to
related parties
 Based on place of effective management/ location of assets.
Exemption
Qatar
Quwait
Saudi
Iran
1. “Specified income” of CFC - Rs.25 lakhs or below; or
2. CFC engaged in active trade/business and passive & other
Turkey
Oman
Bahrain
Iraq
related party income < 50%; or
3. CFC is listed on a stock exchange in the country of
residence.
Profits of Trading cum Holding Company taxed in hands of the Indian parent
without actual distribution if the qualified as a CFC
119
Computation mechanism
A – “Specified Income” of CFC
Income attributable to CFC = A * B * C
100 D
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
“Specified income” = (M+N–O–P) * Q / R
of 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
CFC to impact overseas investments / intra-group supply chain arrangements
Computation mechanism encompasses “Active” as well as “Passive” income !!
120
Case Study – Computation of Passive Income
Illustrative projections
Amount in Rs. Crores
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
1,900
2,130
3,759
2,839
3,441
400
480
1,944
842
1,245
Total Income
Passive Income
B+C
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.
Important to establish active income test for qualifying for CFC exemption
121
POEM
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
Indian Company
Income earned by the
Trading cum Holding
company to be taxed
India
Outside India
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
Trading cum
Holding Company
• in a case where the board of directors routinely approve
Imperative to hold Board
meetings, have local
directors, make business
decisions in Trading
Company
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
Impact / Issues
Qatar
Quwait
Saudi
Iran
Turkey
Oman
Bahrain
Iraq
• Expression ‘at any time’ very wide.
• Meaning of the expressions ‘routinely’ / ‘commercial and
strategic decisions’?
122
Case Study – Use of SPVs (Controlled Foreign Company)
I Co.
I Co. holding F Co. through IHC
India
Overseas
Use of SPV/ IHC designed to delay/avoid
Indian taxes on the dividend income to
be received from F Co.
Intermediate Holding
Company (IHC)
F Co.
CFC like taxation of the income of IHC in India- Invoking the GAAR provisions on deferral of
income?
123
Deputation issues –
Outbound
Why secondment
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.
125
Tax considerations
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
126
Employer – Employee
HOME COUNTRY
• Departure formalities
• Residential status
• Tax filings
• Reporting overseas income
HOST COUNTRY
Host Country tax registration
– Tax filings
– Reporting of Indian income
 Employment income
 Bonus
o Tax credit on overseas income
 Stock options
o Tax Refunds
 Other income
– Tax credit
127
Case Study- Global E-Business Operations
Overseas
Company
Facts
 Under a Secondment Agreement, ABC
Services to the Overseas
Company
Company seconded its employees to the
Overseas Company
Reimbursement by Overseas
Company of the remuneration
paid by ABC Co
Seconded
Employees
Overseas
India
seconded employees and the Overseas
Company shall reimburse ABC Co to the
Employees seconded to
Overseas – Remuneration
paid by ABC Co.
ABC Company
 ABC Co. shall pay remuneration 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
Answers
&
Questions
Thanks