Investing in and out of India Recent Developments

Transcription

1 Investing in and out of India Recent Developments Girish Vanvari International Taxation Conference 2011 Foundation for International Taxation December 2011

2 Contents Inbound Investments LLP FDI and Tax Aspects Key Rulings Impact of GAAR Outbound Investments Introduction of POEM and CFC 2011 KPMG, an Indian Partnership and and a a member firm firm of the of the KPMG KPMG network network of independent of member firms affiliated with independent KPMG International member firms Cooperative affiliated ( KPMG with KPMG International ), a Swiss Cooperative entity. All ( KPMG rights reserved. 1

3 5 Inbound Investment Key Tax and Financial considerations 2 Entry Strategy Income flows and their taxability 1 3 Financing options 6 Exit considerations Inbound Investments Inbound Investments 4 Debt Structuring Cash repatriation 2

4 Inbound Investment Structures Key factors Simple to set up and administer Investor friendly Minimal ongoing compliance Upfront addresses the tax planning for future exit Ease of winding up Overall, is based on sound tax and regulatory positions 3

5 Foreign Direct Investment ( FDI ) in LLP FDI now permitted in LLP with prior FIPB approval What is permitted Important points Allowed in sectors where 100% FDI is permitted under Automatic Route and there are no FDI-linked performance related conditions Downstream investment by an Indian Company with FDI, into a LLP permitted, if Indian company and LLP both operate as above Examples of sectors with FDI-linked performance related conditions are NBFC, Development of Townships, Housing, Built up infrastructure and Constructiondevelopment projects, etc. FDI in LLP not permitted in Agricultural / Plantation activity, Print Media and Real Estate business Investments in LLP by FII / FVCI not permitted DP to be Indian company or person resident in India Capital contribution only in cash by way of inward remittances / through NRE / FCNR accounts Downstream investment by LLP with FDI - not permitted LLP not permitted to avail External Commercial Borrowings (ECB) Conversion of Company with FDI, into LLP also permissible 4

6 FDI in LLP Indicative list of sectors falling under 100% Automatic Route but subject to conditions under respective legislations Mining Petroleum and Natural Gas sector Will the conditions under the respective legislations be interpreted to be FDI-linked performance related conditions? Would FDI in LLP be therefore permitted in the above sectors? Civil Aviation Power In some of these sectors, a Company form of entity may be an imperative 5

7 Foreign Exchange Regulatory Framework Key watch outs RBI guidelines on FDI in LLP awaited Procedures for secondary Approval / Intimation / Compliance Lock-in of Capital Valuation parameters qua Admission Retirement Transfer / realignment Restrictions on Interest on Capital 6

8 The LLP Advantage Tax Benefits Not liable to DDT (16.22%), facilitating tax free profit repatriation Not liable to MAT (20.01%) on book profits (subject to AMT) Surcharge not applicable (effective savings 1.55%) Operational flexibility Perpetual succession and limited liability of partners Separate legal entity - can hold property / sue in its own name Flexibility in capital drawdown by partners LLP agreement - governs ownership, control and management Lower Compliance No board meeting / shareholders approval for business conduct No restriction on related party transactions No requirement to transfer profits to reserves 7

9 Ardex Mauritius (AAR)

10 Ardex Investments Mauritius Ltd. - AAR Ardex Mauritius proposed to sell shares held in an Indian Company to Ardex Germany Question before AAR whether capital gains exempt in India Taxpayer s contention CBDT Circular 789 dated 13 April 2000 SC decision in Azadi Bachao Andolan AAR ruling in E*Trade Mauritius Ltd. Revenue s contention Ardex UK actually funded purchase of shares by Ardex Mauritius Ardex Mauritius shell company with no revenue and meager expenses Bombay HC decision in Aditya Birla Nuvo Ltd. Ardex UK Ardex Mauritius I Co Proposed sale of shares Ardex Germany Based on reports we understand that AAR has ruled in favour of Ardex Mauritius and granted India-Mauritius Tax Treaty benefits 9

11 General Anti-Avoidance Rule ( GAAR ) Rights / Obligations not at arm s-length Misuse / Abuse of DTC Re-characterize Equity -Debt, Income, expenses, relief, etc Deemed connected person as same, etc Treat the arrangement as void Is tax benefit the main purpose of arrangement (impermissibl e avoidance arrangement) Disregard/ combine/ recharacterize the arrangement Disregard accommodatin g parties/ Treat parties as one and the same Re-allocate income, expenses, relief, etc Lacks commercial substance Is not for bonafide purposes How would Ardex-like transaction be viewed in a GAAR regime? 10

12 Vodafone International Holding B.V.

13 The Transaction Simplified Structure VIH B.V. (Netherlands) SPA for Share sale HTIL (CI) Intermediate holding cos HTI (BVI) Hldgs (BVI) CGP (CI) 3GSPL (India) Mauritius Cos Indian Cos Options to acquire 15.03% 51.96% HEL (India) Share Purchase Agreement between VIH BV and HTIL Transfer of shares CGP from HTI (BVI) to VIH BV Transaction value USD 11bn (approx) 12

14 Vodafone Sequence of events September 2007 Issue of Notice Tax authorities issued notice to VIH for failure to withholding tax on payments made to HTIL October 2007 Writ filed Sale of shares of a foreign company between two non-residents - Not taxable in India Indian Tax authorities do not have any jurisdiction December 2008 Bom. HC writ petition Transaction prima facie taxable in India Constitutional challenge cannot be adjudicated in absence of relevant agreements, etc January 2009 SC writ Tax authorities directed to decide the preliminary issue of jurisdiction Permitted VIH to challenge Tax authorities on jurisdiction directly before HC January 2009 Tax authorities action Sep 2010 Underlying value derived from Indian business; Controlling interest in Indian companies transferred - Transaction constitutes a transfer of composite rights in HEL Tax authorities allege failure on part of Vodafone to withhold taxes Vodafone approached Bom HC Bom HC dismissed petition Vodafone filed a petition with the SC SC directed Vodafone to discharge tax demand of INR 2,500 Cr 13

15 Highlights of Bombay High Court Ruling Chargeability Vodafone received the various rights and entitlement from HTIL which constitute capital assets as per section 2(14) of the Act: It would be simplistic to assume that the entire transaction was fulfilled merely upon the transfer of shares of CGP The transaction documents independently recognise the rights and entitlement of HTIL in relation to Indian business which was transferred to Vodafone Apportionment The Assessing Officer would apportion income which resulted to HTIL between income that has accrued or arisen (or deemed to have accrued or arisen) as a result of nexus within the Indian taxing jurisdiction and that which lies outside Extra territorial operation of Section 195 of the Act The provisions of Section 195 can apply to a non-resident provided there is a sufficient territorial connection or nexus between him and India Vodafone by virtue of diverse agreements entered into by it has nexus with Indian jurisdiction Proceedings initiated under Section 201 of the Act for failure to withhold tax by Vodafone cannot be held Bombay to lack jurisdiction HC decision is challenged before Supreme Court 14

16 Issues argued before Supreme Court Income chargeable to tax under Section 9 Transfer of shares resulting into transfer of underlying assets Extra-territorial applicability of Section 195 Look through approach substance v. form Whether the transaction was designed to avoid tax Discussion on Azadi Bacho Andolan and McDowell s decisions Discussion on Aditya Birla s decision Control of Holding company on subsidiary company Whether Vodafone could have explored the Mauritius route Discussion on India Mauritius tax treaty AT&T has been allowed to intervene in the proceedings before SC Verdict of the SC keenly awaited 15

17 Aditya Birla Nuvo Ltd. - Bombay HC

18 Aditya Birla Nuvo Ltd. Bombay HC (1) Capital gains on transfer of shares of Idea and related issues Under the JVA, all rights in respect of shares, like voting rights, management rights, etc. vested in AT&T US No documentation to show AT&T Mauritius has entered into any transaction to subscribe to the shares of Idea in its own name; Allotment of shares in the name of AT&T Mauritius did not confer beneficial ownership to it under the terms of the JVA; No relevance of Circulars 682, 789 and SC decision in Azadi Bachao Andolan which applied to investments made by only Mauritian entities and not non-mauritian entities 1 Sale of shares of ICL ABNV AT&T US AT&T Mauritius ICL Sale of shares of AT&T Mauritius TIL 2 *Aditya Birla Nuvo Limited v. DDIT and Union of India 17

19 Aditya Birla Nuvo Ltd. Bombay HC Held capital gains accruing or arising to the AT&T US on transfer of a capital asset situated in India. ABNL to be regarded as representative assessee under Section 163 of the Act Nil withholding of tax certificate obtained by ABNL by furnishing incorrect facts and making misleading statements; hence would not preclude to initiate proceedings under Section 163 of the Act (2) Capital gains on transfer of shares of AT&T Mauritius HC observed that TIL instead of Purchase shares of Idea from AT&T US, purchased shares of AT&T Mauritius TIL could not be said to be unaware of the fact that AT&T Mauritius held shares in Idea Sale would amount to transfer of capital asset situated in India 1 Sale of shares of ICL ABNV AT&T US AT&T Mauritius ICL TIL 2 Sale of shares of AT&T Mauritius 18

20 E*Trade Mauritius Limited (AAR)

21 E*Trade Mauritius Limited 324 ITR 1 (AAR) E*Trade Financial Corporation USA Legal position (Pre E*Trade) on availability of capital gains exemption under Tax Treaty Circular TRC issued by Mauritian Revenue sufficient for granting Tax Treaty benefits Mauritius Azadi Bachao Andolan (SC) - upholding validity of Circular as well as Treaty shopping in the absence E*Trade Mauritius Limited Transfer of shares 43 percent HSBC Violet Investments of a LOB clause Holding before transfer India IL&FS Investmart (Public Co.) Holding after transfer 20

22 E*Trade Sequence of events E*Trade actions Application for Nil tax withholding 1 Authorities actions Application rejected by AO with directions to withhold tax at 41 percent Filed writ petition against order with HC 2 File revision petition with DIT Release sale proceeds after withholding tax Tax withheld to be deposited with HC Filed revision petition with DIT Writ petition with HC 3 4 DIT effectively upheld AO order; marginal relief on tax rate Substance of M Co challenged Taxes to be deposited with Tax Authorities No comment on taxability of transaction Pursuant to the above E*Trade filed an application before the AAR 21

23 E*Trade AAR Ruling AAR views Capital gains tax exemption under India Mauritius Tax Treaty available to E*Trade, Mauritius Validity of Circular TRC issued by the Mauritius Tax Authority is at least a presumptive evidence of beneficial ownership for both dividend as well as capital gains SC decision in case of Azadi Bachao Andolan validating the Circular applies Scope of inquiry on US parent company to be confined on the lines of the legal position laid down by the SC Validity of treaty shopping - based on the SC decision and the facts and circumstances, the design of tax avoidance itself may not be objectionable and Treaty shopping may be permitted, if it is within the framework of law and is not prohibited by law SLP has been filed before SC by the Tax Department alleging that AAR ruling effectively prevented it from making any inquiry into the real state of matters and was therefore bad in law 22

24 Overseas Investment

25 Overseas Investment Key Drivers Access to Global Markets Inorganic Growth Fund Raising Global Brand Building Spreading / Hedging Risk Indian MNC With the globalization, Indian companies are looking for business opportunities beyond their boundaries 24

26 Overseas Investment - Funding Foreign exchange from an authorized dealer In exchange of ADR / GDR Balances held in the EEFC account Source of Investment Utilization of ECB / FCCB proceeds Capitalization of exports Swap of shares 25

27 Outbound Investments Key considerations Branch v. subsidiary Whether to invest directly or through a holding company? Where to locate the holding company? How to fund the investment? Whether a holding company required in the target jurisdiction? Debt push down possible? Desire to repatriate income Future expansion strategy 26

28 Potential new Residency rule under DTC / Finance Bill 2012 Determined based on Place of effective management ( POEM ) Company resident if POEM situated in India, at any time in the FY Place of effective management of the company means the place where the board of directors of the company or its executive directors, make their decisions; or in a case where the board of directors routinely approve the commercial and strategic decisions made by the executive directors or officers, the place where such executive directors or officers perform their functions. 27

29 Potential new Residency rule under DTC / Finance Bill 2012 Employees of Indian companies discharges key functions / roles vis-à-vis overseas group companies Regional heads of overseas group companies are in India Who are impacted? Employees of Indian companies who are on the Board of overseas group companies Group companies who conduct Board or other meetings in India Indian residents on Board of a foreign companies Imperative to evaluate residency in India of overseas group entities under the potential new Residency rule 28

30 India CFC Trigger Conditions Active Trade / Business Test Foreign Co is not engaged in industrial / commercial / financial activities through employees / personnel; or Passive income > 50% of income Passive income includes sale of goods / supply of services to interalia any AEs Control Test Resident(s) of India controls CFC through: Capital; or > 50% Voting power; or Assets Dominant influence due to special contractual relationship Decisive influence in shareholder meeting Stock Exchange Test Shares are not traded on any stock exchange recognized by State of Residence of CFC CFC trigger conditions Minimum threshold Specified Income > INR 2.5 Mn Lower rate of Taxation Taxes paid in a Foreign country < 50% of taxes payable in India (assuming taxable profits is computed under the DTC) Income attributable to a CFC taxable in the hands of Resident Income to be computed based on prescribed formula Resident assessee to furnish details of investments / interest in entities outside India

31 Computation Mechanism Income attributable to CFC = A * B/100 * C *D A Specified Income of CFC 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/ Potential new Residency rule under DTC IAS // Finance As notified Bill 2012 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!!

32 Parting Thoughts

33 Parting thoughts Supreme Court decision in the case of Vodafone would lay down the structuring path for future inbound investments & divestments Economic substance and business purpose more relevant than before The taxpayer- Tax Office spat under India-Mauritius Tax Treaty refuses to die down International holding structures and sophisticated cross border planning likely to attract increased scrutiny by Indian tax authorities DTC likely to miss the deadline of 2012 Impact of GAAR, POEM and CFC to be analyzed, if brought into the Finance Bill

34 Bangalore Solitaire, 139/26, 3rd Floor, Inner Ring Road, Koramangala, Bangalore Tel Fax Kochi 4/F, Palal Towers, M. G. Road, Ravipuram, Kochi Tel +91 (484) Fax +91 (484) Chandigarh SCO st floor. Sector 8 C Madhya Marg Chandigarh Tel : Fax Kolkata Infinity Benchmark, Plot No.G-1, 10th floor, Block - EP & GP, Sector - V, Salt Lake City Kolkata Tel: Fax: The information contained herein is of a general nature. The content provided here treats the subjects covered here in condensed form. It is intended to provide a general guide to the subject matter and should not be relied on as a basis for business decisions. A detailed analysis of the tax and regulatory implications should be done prior to implementation in order to determine the feasibility of the transaction at the time of implementation. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. Specialist advice should be sought with respect to any individual circumstances. KPMG and the KPMG logo are registered trademarks of KPMG International Cooperative ( KPMG International ), a Swiss entity. Chennai No. 10, Mahatma Gandhi Road, Nungambakam, Chennai Tel Fax Delhi Building No.10, Tower B, 8th Floor, DLF Cyber City, Phase II Gurgaon Haryana Tel Fax Hyderabad /2 Reliance Humsafar, 4th Floor Road No. 11, Banjara Hills Hyderabad Tel Fax Mumbai Lodha Excelus, 1st Floor, Apollo Mills Compound, N.M. Joshi Marg, Mahalakshmi, Mumbai Tel Fax Pune 703, Godrej Castlemaine Bund Garden Pune Tel: / 65 Fax: