Cross Border Investments: Mergers and Acquisition and Choice of Jurisdiction

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1 : Mergers and Acquisition and Choice of Jurisdiction Raju Kumar Partner - Tax & Regulatory Services 4 September 2014

2 Going Global Acquisitions of existing overseas business/assets Setting up of JV with suppliers/distributors Making green field investments Setting up marketing/ selling activities Setting up manufacturing/ sourcing activities Search for new markets Need for new technologies Access to Natural Resources Product & Market Diversification Reduce India dependence Raise Global Finance Distressed assets Vertical Integration Regulatory Evolution Bureaucracy within India

3 Outbound Structures: Key Imperatives Overall tax & regulatory efficiency of the Group Overall Business Strategy Consolidation of earnings/losses Easy to acquire and disinvest TAX Tax efficient repatriation of income flows NON TAX Value creation Access to international markets Exit strategies to optimize tax cost Control mechanism

4 Typical Outbound Investment Structures DIRECT ACQUISITION SINGLE TIER SPV STRUCTURE TWO TIER SPV STRUCTURE INDIA COUNTRY HAVING GOOD TAX TREATY WITH INDIA SPV 1 COUNTRY HAVING GOOD TAX TREATY WITH TARGET COUNTRY SPV SPV 2 TARGET COUNTRY Tax inefficient Dividend withholding tax Immediate taxation on income flows in India Capital gains on exit Tax efficient Deferral of Indian taxes Consolidation of earnings Flexibility in fund movement

5 Debt Structures DEBT AT INDIA LEVEL DEBT AT SPV LEVEL DEBT AT TARGET LEVEL DEBT INDIA SPV JURISDICTION SPV 1 SPV 1 SPV 1 DEBT SPV 2 SPV 2 SPV 2 TARGET COUNTRY DEBT Interest cost deductible in India Tax inefficient, if the SPV does not have any tax outflow on income streams Interest deduction against Target s profits

6 Objective: Overall Business and Segment Consolidation INDIA SPV JURISDICTION SUPER HOLDING OIL & GAS POWER MINERALS SPV 1 SPV 2 SPV 3 TARGET COUNTRY ASSET 1 ASSET 2 ASSET 1 ASSET 2 ASSET 1 ASSET 2

7 Destinational Trend Singapore Mauritius Netherlands United States of America United Kingdom United Arab Emirates British Virgin Islands, Cayman Islands, Honk Kong & Switzerland Other Countries Source: RBI

8 Choice of Jurisdictions: Factors to be considered Corporate tax rate Taxation of dividend/ interest Withholding tax on dividend/ interest Capital gain tax on transfer of investments / shareholding Thin Cap rules Ease of access to debt and equity capital Black listed Countries Treaty network Cost of setting up and administration Other non tax considerations like political stability, banking facility etc. Anti avoidance measures like CFC, etc. Treatment of tax losses Mauritius Singapore Luxembourg UAE Netherlands Cyprus BVI/ Cayman (Tax Havens) UK

9 Choice of Jurisdictions: Some popular holding jurisdictions Netherlands UK Singapore Mauritius Standard rate of tax Participation exemption Participation exemption Dividend WHT to India Thin capitalization 25% 21% (reducing to 20% from 2015) Yes Minimum holding of 5% Yes minimum holding of 5% 5% under treaty (0% if co-op structure is 3:1 ratio or group ratio if higher Yes on minimum holding requirement of Yes - on minimum holding 10% under the 0% under UK Domestic Rules Arm s length requirement CFC rules No Yes however various exemptions available 17% 15% NA, but foreign sourced income not NA, capital gains are not taxed 0% under domestic laws No thin cap rules in place No NA, foreign income taxed at 15%, but NA, capital gains are not taxed 0% under domestic laws No thin cap rules in place No

10 Aspects for consideration Corporate Guarantees Control and Management Multi-layer structures Controlled Foreign Company (CFC) regulations Anti avoidance provisions Bilateral Investment Promotion and Protection Agreements (BIPAs)

11 Thank you