tax structuring recent developments · india playing a key role in the deliberations ... llp v....
Post on 22-Jul-2020
1 Views
Preview:
TRANSCRIPT
Tax Structuring – Recent Developments
1
Dinesh Kanabar
1 8 F e b r u a ry 2 0 1 5
2
1. T h e S c e n a r i o
2. I n b o u n d S t r u c t u r i n g
3. O u t b o u n d S t r u c t u r i n g
4. B E P S – a n o v e r v i e w
5. K e y T a k e a w a y s
A g e n d a
3
The Indian Scenario
• Economy on the cusp of recovery – potent ia l for double dig i t growth seen
• Investor sent iment on the upswing
• High expectat ion of economic reform
• Fal l ing global o i l pr ices and weakening domest ic inf lat ion – create room for
large scale reform
• Posi t ive developments on the tax front :
• GAAR slated to come into force on 1 Apr i l 2015
• I n c re as ed e n g a g e me n t w i t h t a xp a ye r s
• F o c u s o n a vo i d i n g p r o l o n ged l i t i g a t i on
• I m p r ove m en t i n o ve r a l l t a xp a ye r e xp e r i e n c e t a r g e t ed
Uncertainty and litigation on key issues continue
4
The Global Scenario
• Governments fac ing signi f icant f iscal pressures
• Increased pol i t ica l and publ ic focus on perceived tax avoidance by
mul t inat ional companies
• Widespread recognit ion that the internat ional tax regime is inadequate to
address current chal lenges faced by developed and developing countr ies
• Aggressive dr ive to reform underway as part of the OECD‟s BEPS ini t iat ive –
Ind ia playing a key ro le in the del iberat ions
• I n c reased sc ru t i ny o n c ross -bo rde r t r ansac t ions and s t ruc tu res in seve ra l
coun t r i es
Tax Structuring – now a challenging, dynamic and multi-faceted exercise
5
Inbound Structuring – Issues and Developments
6
Key Considerations - Inbound
Choice of entity
Foreign Tax Credit
Availability
Use of Holding Companies
Exit StrategyCash
Extraction
7
Choice of Entity: LLP v. Company
Private company LLP
Income Tax
Corporate Tax Rate applicable –32.45% / 33.99%
DDT @ 19.994 %* on distribution of profit by way of dividend; Dividend exempt in hands of shareholder
MAT @ 20.96% applicable on Book profits
BBT @ 22.66% applies on share buyback
Corporate tax rate applicable – 33.99%
DDT & BBT is not applicable; Share of profit is exempt in hands of partner in India
AMT @ 20.96% on Adjusted Total Income (typically, applies where tax holidays are claimed)
Deemed Dividend provisions under s. 2(22)(e) not applicable
Foreign Direct Investment (FDI) & Foreign Exchange
Management Regulations
(FEMA)
No FIPB approvals required for FDI at the time of entry or exit as long as activities are covered under the automatic route
Foreign investment can be done by way of cash consideration, swap of shares, conversion of receivables etc.
FDI permitted only for activities covered under automatic route & subject to prior approval from FIPB
Foreign capital participation in LLP –by way of cash contribution only
8
Choice of Entity: LLP v. Company
Private company LLP
Governance Framework
Higher statutory reporting requirements
CSR spend of 2% of net profits compulsory
Requirements for holding minimum number of board meetings
Decisions subject to shareholders / Board approval
Related party transactions are subject are subject to board / shareholder’s approval and arm’s length pricing
Relatively limited reporting requirements
LLP not required to comply with CSR obligations
Greater flexibility for conduct of business
Governed by LLP agreement - No requirement for approvals / minimum meetings
9
Choice of Entity: LLP v. Company
Key Advantages of LLPs
• Tax Eff ic ient st ructure as no MAT, DDT & BBT appl icable
• No mandatory CSR spend of 2% of prof i ts .
• Operat ional f lexib i l i ty and reduced compl iance costs
Key Considerations
• New ven tu res can be housed in a n LLP ins tead o f ex i s t i ng co rpo ra te
en t i t i es
• Conve rs i on o f ex i s t i ng compan ies in to LLPs poss ib l e :
• S t r i n gen t c o n d i t i ons f o r t a x - n e u t ra l i t y - I N R 6 0 L a k h s t u r n o ve r c r i t e r i a
• A r g u m en t s f o r n o n - t axa b i l i t y b a s e d o n f i r s t p r i n c i p l es p o s s i b l e –
p o s i t i on l i t i g a t i ve
LLPs – a key component of inbound tax structuring
10
Use of Holding Companies
Direct Investments in India
Foreign Investor
Indian Co.
• Capita l gains on sale of shares of Indian
company taxable in India
• Treaty benef i t avai lab le in respect of capital
gains avai lable only in to select countr ies
• Risk of double taxat ion due to conf l ict ing
„source‟ ru les
i .e. Foreign Investor ‟s jur isd ict ion may
consider capita l gains on sale of Indian Co.
shares as „domest ic ‟ sourced income not
e l ig ib le to fore ign tax credi ts (e.g. US)
11
Use of Holding Companies
Use of intermediate holding companies
Foreign Investor
Hold Co.
• Risk of double taxat ion can be mit igated
through Holding companies si tuated in
countr ies wi th favourable treaty provis ions
(e.g. Maur i t ius, Singapore, Nether lands etc . )
• Claim for treaty benef i ts in India under
increased scrut iny – need for careful
s t ructur ing
• Claim to be backed up by:
a) Substance in jur isdic t ion of Hold Co.
b) Commercial ra t ionale for use of Hold Co.
c) Avai lab i l i ty of Tax Residency Cert i f icates
d) Compl iance wi th LOB Art ic le ( i f any)
Indian Co.
Boilerplate structures involving holding companies – no longer advisable
12
Use of Holding Companies
Use of mult i - t ier structures – addit ional considerations
Foreign Investor
Hold Co. 1
• Retrospect ive amendments to s. 9(1)( i ) –
Foreign Investor Co., HoldCo 1 and HoldCo
2 shares deemed to be situated in India i f
they derive value substant ia l ly from assets
located in India
• Meaning of „substant ia l ly‟ under Sect ion
9(1)( i ) not certa in – Delhi HC‟s cr i ter ia >
50%
• No pro-rata taxat ion or exemption for l isted
foreign co shares, group restructur ing under
current law
• Taxabi l i ty in India of dividends paid by Hold
Co. 2 and Hold Co. 1 – an area of concern
• No clar i ty on appl icabi l i ty of treaty benef i ts
in case of sale of shares of HoldCo 1 or
HoldCo 2
Hold Co. 2
India Co.
13
Cash Extraction
Tax Implications
• Dividend Distr ibut ion Tax @ 19.994 payable on
dividends declared, distr ibuted or paid by domest ic
companies
• Buyback Tax @ 22.66% on „d ist r ibuted income‟
payable by domestic companies on buyback of unl isted
shares
• Interest payments l iable to withhold ing @ 10%
Concessional tax @ 5% on interest avai lab le in certain
cases
• 25% rate on royalt ies / FTS under domest ic law –
lower rates may be avai lable under t reat ies
• Dividends
• Buyback of Shares
• Interest
• Royalties
• Fees for Technical
Services
Significant tax costs associated with cash extraction – proper planning needed
14
Other Considerations
• Foreign Tax Credit avai lab i l i ty in home jur isd ict ion on income-streams from
India to be evaluated
• For e.g. credi tabi l i ty of DDT and Buyback tax could pose content ious as:
• Non-avai labi l i ty of credi ts could s igni f icant ly affect tax costs and overal l
f inancial pro ject ion
• App l i cab i l i t y o f MAT to cap i t a l ga ins ea rned b y fo re i gn compan ies in
favou rab le t r ea t y j u r i sd i c t i ons - a l i t i ga t i ve i s sue
• Con f l i c t i ng dec i s i ons o f AAR o n the above :
• Timken Co . I n r e (3 2 6 ITR 1 9 3 )
• Cas t l e ton In r e (3 4 8 ITR 5 3 7 ) (SLP pend ing be fo re the SC)
Need for clarificatory amendments
• D D T / B u yb a c k t a x i s l e v i e d o n t h e c o m p a ny a n d n o t o n t h e s h a r e ho ld e r
• D D T / B u yb a c k t a x i s n o t p a i d o n b e h a l f o f s h a r e ho l de r s
• U n d e r l y i n g t a x c r e d i t s m a y n o t b e a l wa ys a va i l a b l e
15
Outbound Structuring – Issues and Developments
16
Outbound Investments – Regulatory Aspects
• Under the Automat ic Route, an Indian Party does not require any pr ior
approval f rom the RBI for set t ing up a JV/WOS abroad
• The cr i ter ia for d i rect investment under the Automatic Route are as under :
• Certain addit ional condit ions to be ful f i l led in case investment by an Indian
Party engaged in Financia l Services Sector
• Investment in foreign companies engaged in real estate, trading in TDRs and
banking business requires pr ior approval of RBI
Investments up to 400% of Net worth
Valuation requirements to be complied with respect to the value of investments
All transactions relating to a JV / WOS routed through one branch of an AD bank
Indian Party not on RBI’s caution list / under investigation by enforcement agency
Submission of APR in respect of all overseas investments
Indian subsidiary is required to report its investments in form ODI to the AD bank
17
Key Considerations - Outbound
Need for SPVs
IPR Regime
Holding Company Regimes
Withholding tax provisions
Participation exemption /
thin cap rules
18
Use of SPVs – Some Benefits
Flexibility in borrowing
JV Private Equity Funding
Bilateral Agreements
Tax Efficiency Ease in Exit Overseas Listing
Flexibility in corporate
structuring
Ring fencing of Risk
19
Key Considerations
Part ic ipat ion Exempt ion
• Exempt ion in SPV‟s jur isd ict ion for dividend income and capital gains from
downstream investments upon fu l f i lment of cer ta in condi t ions
• Condit ions typical ly pertain to sharehold ing pattern, jur isd ict ion of parent
ent i ty and percentage of hold ing
IPR Regime
• Specif ic incent ives, deduct ions and exemptions avai lable in some jur isd ict ions
in re lat ion to IPR hold ings
• Patent Box regime (i .e. concessional rate for royalty incomes from certain
IPRs) and deduct ion for c inematographic f i lms given in UK
• Accelerated Deduct ion al lowed on R&D spends in Singapore and Switzer land
Withholding tax provis ions
• WHT exempt ions on dividends / royal t ies / in terest (e.g. under EU direct ives)
20
Key Considerations
Favourable Hold ing Company Regimes
• Lower income-tax rates for hold ing companies under specif ic holding company
regimes (e.g. UK, Singapore)
• Existence of CFC provis ions
• Good Treaty Network
Thin capi tal izat ion ru les
• Companies said to be thin ly capita l ised when its capita l is made up of a much
greater proport ion of debt equi ty
• Tax eff ic ient cash repatr iat ion possible by cla iming tax deduct ion for interest
on debt
21
BEPS – an overview
22
BEPS – An Overview
• On 19 July 2013 the OECD released an Act ion Plan
on Base Erosion and Prof i t Shif t ing (BEPS) which
was presented to the meet ing of G20 Finance
Minis ters in Moscow..
• The purpose of the Act ion Plan is “ to prevent
double non-taxat ion, as wel l as cases of no or low
taxat ion associated with pract ices that art i f ic ia l ly
segregate taxable income from act ivi t ies that
generate i t . ”
• The report indicates that “no or low taxat ion is not
per se a cause for concern, but i t becomes so when
it is associated wi th pract ices that art i f ic ia l ly
segregate taxable income from the act ivi t ies that
generate i t . ”
• The Act ion Plan covers 15 specif ic Act ions which
are broadly to be achieved with in a two year t ime
f rame ( i .e . by the end of 2015).
Thecoherence of corporate tax
at the international
level
Transparency, coupledwith certainty and
predictability
Realignment of taxation and substance
23
BEPS – An Overview
Focus on key i tems
• Transfer pr ic ing, hybr ids, in terest deduct ions, t reaty abuse and the d ig i ta l
economy
Wide ranging act ions, for example:
• Changes to the Model Tax Convent ion (e.g. in re lat ion to hybr ids, t reaty abuse)
• Recommendations regarding the design of domest ic law (e.g. CFC ru les, in terest
deduct ions)
• Changes to the TP guidel ines (e.g. in re lat ion to ensur ing TP outcomes are in
l ine wi th value creat ion)
A number of the act ions are l inked, for example:
• The act ions on CFCs, in terest deduct ions, and hybr ids wi l l be c losely l inked
BEPS outcomes to have a significant impact on cross-border structures
24
BEPS – An Overview
June 2012Project
announced / started
February 2013Document released „Addressing Base Erosion and Profit
Shifting’
July 2013Release of Action
Plan with 15 separate
actions/work streams
September 2014Project Completion
of approximately 1/3 of Action Plan
September 2015
Completion of
remainder action plan
2016 onwardsMonitoring, additional /
ongoing actions
Coherence
• Action Item 2*: Hybrid mismatch arrangement
• Action Item 3: Controlled Foreign Company rules (CFC)
• Action Item 4: Interest deductions
• Action Item 5*: Harmful Tax practises
Substance
• Action Item 6*: Preventing tax treaty abuse
• Action Item 7: Avoidance of permanent establishment status
• Action Item 8*: Transfer Pricing aspects of intangibles
• Action Item 9: Transfer Pricing/risk and capital
• Action Item 10: Transfer pricing/high risk transactions
Transparency
• Action Item 11: Methodologies and data analysis
• Action Item 12: Disclosure rules
• Action Item 13*: Transfer pricing documentation
• Action Item 14: Dispute resolution
Ac
tio
n I
tem
1:
Dig
ita
l E
co
no
my
Ac
tio
n I
tem
15:
Mu
ltila
tera
l In
str
um
en
t
25
BEPS – Key Risk areas and
Actions
• Digi ta l economy
• Hybr ids
• Treaty abuse
• Dependence on speci f ic PE except ions
• Signi f icant in terest deduct ions
• In tangibles, and which group company has an in terest
• Contractual a l locat ion of r isk and capi tal versus Key enterpr ise
r isks /Signi f icant People Funct ions
• Does TP pol icy overa l l make economic sense?
• Operat ional s t ructures – does income ref lect economic act ivi ty?
Part icular focus should be p laced on the use and explo i tat ion of
in tangib les
• Transfer pr ic ing pol icy A renewed focus on APAs?
• Robust documentat ion and evidences to be mainta ined –
especia l ly qua conduct of par t ies
• In ternat ional f inancing and organisat ional s t ructures – are they
sustainable in l ight of the BEPS recommendations?
• Consider potent ia l impact on p lanning arrangements current ly
being contemplated
Key Risk
areas
Actions
26
Substance and BEPS
• The „substant ia l act ivi ty‟ factor: whether a regime “encourages pure ly tax -dr iven
operat ions or arrangements”
• Are taxpayers der iving benef i ts f rom the regime whi le engaging in operat ions
that are pure ly tax-dr iven and involve no substant ia l act ivi t ies.
• Regimes that meets the “no or low ef fect ive tax rates” test wi l l be considered
harmful i f there is no substant ia l act ivi ty in the country grant ing the regime.
• Determining the locat ion of substant ia l act ivi ty - a subject ive determinat ion
The interim report titled „Countering Harmful Tax Practices More Effectively, Taking into
Account Transparency and Substance‟ released by OECD on 16 September 2014 reflects
consensus on the importance of having appropriate “substantial activity” requirements in
preferential regimes and on the need for increased transparency.
New substance requirements formulated in various jurisdiction - companies required to adhere to specific substance requirements for satisfying the substance test
27
Substance and India
• Long standing b ias towards „ form‟ increasingly under chal lenge
• General Ant i -Avoidance Rule enacted – proposed to be made ef fect f rom 1 Apr i l
2015
• Ant i -abuse pr inc iples increasingly invoked by the tax author i t ies and Courts
• Key pr inc iples emerging f rom the landmark SC decis ion in the Vodafone case:
• Tax p lanning wi th in the f ramework of law is permissible unless i t is a sham
or co lorable device
• Onus on the tax author i ty that the t ransact ion is sham
• True nature to be ascerta ined by „ look ing at ‟ the legal arrangement actual ly
entered in to and carr ied out
Era of conventional tax planning over – need for a more sophisticated approach
28
Key Takeaways
29
Key Takeaways
• BEPS – a game changer in the coming years
• Need to focus on domest ic ant i -abuse tax legis lat ions in var ious
jur isdict ions
• Transparency and Exchange of In formation – here to s tay
• Fast changing g lobal tax regimes
• Need for longevi ty and f lexib i l i ty in cross -border s t ructures
• Tax and Moral i ty debate – l ike ly to cont inue
top related