Chartered Accountant 4 th March 2017

Transcription

1 - Dr. Anup P. Shah Chartered Accountant 4 th March 2017 PRAVIN P. SHAH & Co., CA's 1

2 Amendments Mauritius Cyprus Singapore CG LOB CG CG LOB PRAVIN P. SHAH & Co., CA's 2

3 PRAVIN P. SHAH & Co., CA's 3

4 Foreign Investors Tax Haven IHC Mauritius / Singapore / Cyprus / Holland Indian Promoters Indian Investee Co. PRAVIN P. SHAH & Co., CA's 4

5 35% 30% 25% 20% 15% 33% 16% Top FDI Destinations $168 bn or 52% of all FDI was from 3 Tax Havens Mauritius ($108bn) / Singapore ($52bn) / Cyprus ($9 bn) 10% 5% 8% 8% 6% 6% 3% 3% 2% 1% 0% PRAVIN P. SHAH & CO. 5

6 Treaty Shopping is valid and legal Can incorporate IHC in Tax friendly jurisdictions IHC is legal and beneficial owner of shares Entitled to benefits of favourable Treaty with India No Tax in India if Treaty so provides Series of Favourable Decisions ~ Azadi Bachao Andolan (SC) / Vodafone International (SC) / Sanofi Pasteur (AP) PRAVIN P. SHAH & Co., CA's 6

7 Must obtain a TRC S.90(4) r.w. Rule 21AB Also provide Information in Form 10F if not already in TRC TRC is sufficient for claiming Treaty Benefits Azadi Bachao Andolan (SC) CBDT Cir. 789 dated April 13, 2000 Vodafone International (SC) In absence of LOB, TRC sufficient Chiron Bearings GmbH (Bom) / Universal Int l (Bom) Dyanmic India (AAR) No GAAR so TRC enough AAR ~ E*Trade /Castleton / Moody s / Armstrong Worldwide PRAVIN P. SHAH & Co., CA's 7

8 4 Jurisdictions have been favourites for routing FDI into India Mauritius Singapore Cyprus Netherlands 59% of all FDI from 2000 Dec 2016 through these 4 GoI trying hard to renegotiate DTAAs to plug Treaty Shopping!! PRAVIN P. SHAH & Co., CA's 8

9 Taxed in CoR 4 IHC Hotspots 2 with LoB 2 No LOB - GAAR 94 Comprehensive DTAAs 6 - Other Nations 4 10% condition No LoB GAAR No LoB - GAAR Taxed in India 38 with LoB 80 No Condition 42 No LoB - GAAR PRAVIN P. SHAH & Co., CA's 9

10 In case of 4 DTAAs Belgium Denmark France Spain CG on alienation of shares taxable in India only if Forming part of a Participation of at least 10% in an Indian Company Else taxable in Country of Residence of alienator PRAVIN P. SHAH & Co., CA's 10

11 Other Indian DTAAs where CG taxed in CoR LOB Clause in DTAA GAAR will apply CGT in Country of Residence of Seller Jordan (only if Jordan taxes Capital Gains) Yes Kenya No Philippines Yes Portugal Yes Sweden (only if Sweden taxes Capital Gains) Generally No CGT Zambia No PRAVIN P. SHAH & Co., CA's 11

12 PRAVIN P. SHAH & Co., CA's 12

13 Wef 19 th July 2016 Till 2016 Gains by Mauritian Resident taxed in M Residence Based Taxation Residence based Taxation done away in 3 Phases CG from alienation of shares acquired before 1 st April 2017 taxable only in Mauritius Irrespective of when and how alienated CG from alienation of shares acquired after 1 st April 2017 & sold between 1 st April 2017 and 31 st March 2019 taxable in 50% of CGT PRAVIN P. SHAH & Co., CA's 13

14 CG from alienation of shares acquired after 1 st April 2017 & sold on or after 1 st April 2019 taxable in full CGT Source based for Shares ~ Equity / Preference / CCPS CG from alienation of any other property Residence based Taxation Continues Whenever acquired and Whenever Sold Hence, taxable in Mauritius alone PRAVIN P. SHAH & Co., CA's 14

15 Acquired after & Sold after Full CGT in India 1 st Apr st Mar 19 Acquired before No CGT in India Acquired & Sold between these 2 dates 50% CGT + LOB PRAVIN P. SHAH & Co., CA's 15

16 Sale of CCPS Art 3A Shares acquired > Taxed in Mau Shares includes CCPS also However, Protocol silent If CCPS sold as such Exemption should be available What if CCPS acquired > but conversion < and then Equity Shares are transferred? Is conversion of CCPS a Taxable Transfer? Now no FB 2017 wef 1 st April 2017 What about conversion prior to 1 st April 2017? PRAVIN P. SHAH & Co., CA's 16

17 CCDs now a very attractive investment option: Interest 7.5% v 40% earlier CCDs continue to remain taxable in Mauritius If CCDs sold after conversion CCDs converted into shares > Apr 2017 Grandfathering If conversion < April 2017 Which is the Date of Acquisition? Date of CCDs or Date of Conversion? Mrs. A Ghosh / Naveen Bhatia Rule 8A PRAVIN P. SHAH & Co., CA's 17

18 Capital Gain Under Earlier DTAA After Protocol Equity Shares in Ico Taxable in Mauritius Taxable in India in a phased manner CCPS in Ico Taxable in Mauritius Taxable in India in a phased manner CCDs in ICO Taxable in Mauritius Taxable in Mauritius Derivatives Taxable in Mauritius Taxable in Mauritius Sale of Equity after conversion from Preference Shares Sale of Equity after conversion from Debentures Taxable in Mauritius?? Taxable in Mauritius?? PRAVIN P. SHAH & Co., CA's 18

19 Resident cannot take benefit of Art. 13(3B) of Treaty If Primary Purpose is to take advantage of benefits in Art 13(3B) Art. 13(3B) 50% concessional Tax Rate for 2 Years Not for Art. 13(3A) Nil Tax for shares bought before 1 st April 2017? Shell / Conduit MCo. not entitled to Art 13(3B) Any Legal entity which is R of Mauritius Negligible / Nil Business Operations or No real / continuous business in Mauritius PRAVIN P. SHAH & Co., CA's 19

20 Shell / Conduit MCo. not entitled to Art 13(3B) Deemed Shell / Conduit Co. If Expenditure on Operations in Mauritius < Mu Rs 15 lakhs in the immediately preceding period of 12 months from date the CG arise Not Deemed Shell / Conduit Co. if: Listed on Recognised Stock Exchange of Mauritius Expenditure on Operations in Mauritius Mu Rs 15 lakhs in the immediately preceding period of 12 months from date the CG arise PRAVIN P. SHAH & Co., CA's 20

21 Serco BPO v AAR (P&H) Stake Sale by Barclays Mauritius & Blackstone Mauritius AAR held that prima facie a colourable device and hence, buyer liable to deduct tax u/s.195 No reasoning given by AAR for decision Department s Pleas: Real Beneficiaries don t actually reside in Mauritius Sellers don t carry on business / mfg / don t provide services in Mauritius Claim to be Residents only on basis of TRC Clear case of Treaty Shopping PRAVIN P. SHAH & Co., CA's 21

22 Serco BPO v AAR (P&H) P&H HC negated all arguments of Dept No material to show Tax Evasion All documents asked by revenue were produced TRC is a valid document CBDT Cir. 789 Azadi Bachao Andolan (SC) has closely examined DTAA & TRC issue Treaty benefits available even if no tax in Mau Art.13(4) applies to other property taxable only in Mau Art. 13(4) not dependent upon situs of property PRAVIN P. SHAH & Co., CA's 22

23 Serco BPO v AAR (P&H) Art.13(1) on Imm. Prop situs dependent taxable only in I Art.13(2) PE sale - situs dependent taxable only in I Art. 13(3) on ships/ planes taxable where POEM located situs dependent No such stipulation under Art. 13(4) shares are movable property taxable only in Mau Since No Tax in India No liability on Buyer to deduct tax u/s. 195 PRAVIN P. SHAH & Co., CA's 23

24 Goldman Sachs (Mum) Liability to deduct tax u/s. 195 only if Income taxable in India in the first place If under Indo-Mauritius DTAA no CG in India, then no TDS obligations If not liable u/s. 195, then cannot be an assessee in default u/s. 201 C/f this decision with T. Rajkumar (Mad HC) Cyprus PRAVIN P. SHAH & Co., CA's 24

25 Dow AgroSciences Agr. (AAR) Fact that no dividends declared since several years Thus, to the extent of Accumulated Profits = Sale Proceeds of shares should be treated as Dividend and taxed in India C/f with Otis Elevator (AAR) Buyback from Mauritian Co. alone No Dividend declared for several years Device to bypass Dividend being taxed in India Held, buyback taxable as Dividend since not genuine PRAVIN P. SHAH & Co., CA's 25

26 PRAVIN P. SHAH & Co., CA's 26

27 S.94A ~ Cyprus specified as Notified Jurisdictional Area (Notification No.86/2013, dated ) Implications of S.94A & R.21AC No deduction for any payment to FI in Cyprus unless authorisation is furnished in Form 10FC No deduction for any payment to a Cypriot person unless Specified Docs for 8 years 30% or rate prescribed in the Act, whichever is higher PRAVIN P. SHAH & Co., CA's 27

28 Mad HC in T. Rajkumar s.94a considered Imp. Facts Cypriot Co. invested in CCDs of Indian Co. Promoters bought out Loss (Below Face Value) ITO SCN Why no TDS u/s. 94A Mad HC: petitioners should have deducted tax at source. and thereafter fought a legal battle with the Department for refund. PRAVIN P. SHAH & Co., CA's 28

29 T. Rajkumar S.195 neither considered nor cited GE India / CBDT Instruction not considered Is Mad HC s decision in clear conflict with GE? Practical position- deduct tax on gross amount payable to Cypriot company? PRAVIN P. SHAH & Co., CA's 29

30 Protocol to DTAA Notified on Source based taxation after 1 st April 2017 Gains from alienation of shares acquired on or after taxable only in India Grandfathered old investments made prior to Gains from alienation of shares acquired at any time prior to taxable only in Cyprus Sale date not relevant PRAVIN P. SHAH & Co., CA's 30

31 No concessional transition 50% for 2 years Q. Would Interest be 7.5% like for Mauritius? No Interest tax 10% - same as before Clarification: Dividends not taxable / No TDS in India till such time as India continues to levy DDT and Dividend is exempt from tax u/s. 10(34) PRAVIN P. SHAH & Co., CA's 31

32 Surprisingly, No LOB in Protocol No minimum spending threshold No concept of PPT / Shell or Conduit Company Unlike Mauritius and Singapore Several Indian DTAAs amended to insert LOB Only GAAR would apply in case of Cyprus? PRAVIN P. SHAH & Co., CA's 32

33 Notn. 86/2013 Cyprus treated as Non Co-operative Jurisdiction 86/2013 rescinded by Govt. wef Except things done / not done before such rescission Q. What happens to TDS Litigation? SC on T Rajkumar s case Appellant covered by rescinding Notification and hence, it can take advantage of it? Q. How to reconcile the two? PRAVIN P. SHAH & Co., CA's 33

34 PRAVIN P. SHAH & Co., CA's 34

35 Signed on Not yet notified in India ~ In force in Singapore wef Only Press Note from India but IRA of Singapore has released the Protocol Original DTAA amended by 2005 Protocol Residence based taxation to Singaporean Residents Benefits available as long as Mauritius DTAA exists LoB Clause added PRAVIN P. SHAH & Co., CA's 35

36 Residence based Taxation done away in 3 Phases CG from alienation of shares acquired before 1 st April 2017 taxable only in Singapore Irrespective of when and how alienated CG from alienation of shares acquired after 1 st April 2017 & sold between 1 st April 2017 and 31 st March 2019 taxable in 50% of CGT CG from alienation of shares acquired after 1 st April 2017 & sold on or after 1 st April 2019 taxable in full CGT PRAVIN P. SHAH & Co., CA's 36

37 Source based for Shares ~ Equity / Preference / CCPS CG from alienation of any other property Residence based Taxation Continues Whenever acquired and Whenever Sold Hence, taxable in Singapore alone PRAVIN P. SHAH & Co., CA's 37

38 Capital Gain Under Earlier DTAA After Protocol Equity Shares in Ico Taxable in Singapore Taxable in India in a phased manner CCPS in Ico Taxable in Singapore Taxable in India in a phased manner CCDs in ICO Taxable in Singapore Taxable in Singapore Derivatives Taxable in Singapore Taxable in Singapore Sale of Equity after conversion from Preference Shares Sale of Equity after conversion from Debentures Taxable in Singapore?? Taxable in Singapore?? PRAVIN P. SHAH & Co., CA's 38

39 Sing. Resident CANNOT take benefit of NIL CGT in India u/art. 13.4A of Treaty for shares acquired > 1 st April 2017 IF Primary Purpose to take advantage of this Article of DTAA Sing. Resident CANNOT take benefit of 50% CGT in India u/art. 13.4C of Treaty for CG between 1 st April 2017 and 31 st March 2019 IF Primary Purpose to take advantage of this Article of DTAA PRAVIN P. SHAH & Co., CA's 39

40 Shell / Conduit Co. which claims it is a Singapore Resident cannot take benefit of Art.13.4A (Nil CGT) or 13.4C (50% CGT) Shell / Conduit ~ Any Legal Entity with Negligible or Nil Business Operations or No real / continuous business activities in Singapore PRAVIN P. SHAH & Co., CA's 40

41 Shell / Conduit Sing Co. not entitled to Art 13.4A /13.4C Deemed Shell / Conduit Co. Art. 13.4A ~ If Expenditure on Operations in Singapore < S$ 2 lakhs in the immediately preceding period of 24 months from date the CG arise Art. 13.4C ~ If Expenditure on Operations in Singapore < S$ 2 lakhs in the immediately preceding period of 12 months from date the CG arise For full exemption 24 months spending but for 50% exemption only 12 months spending PRAVIN P. SHAH & Co., CA's 41

42 Shell / Conduit Sing Co. not entitled to Art 13.4A /13.4C Not Deemed Shell / Conduit Co. if: Listed on Recognised Stock Exchange of Singapore Singapore Exchange (SGX) Art. 13.4A ~ If Expenditure on Operations in Singapore > S$ 2 lakhs in the immediately preceding period of 24 months from date the CG arise Art. 13.4C ~ If Expenditure on Operations in Singapore > S$ 2 lakhs in the immediately preceding period of 12 months from date the CG arise PRAVIN P. SHAH & Co., CA's 42

43 DTAA shall not prevent India from applying its Domestic Law; and Measures concerning Prevention of Tax Avoidance or Tax Evasion!! Q. What does this mean?? GAAR can override all provisions of the DTAA Even if LoB Clause u/ Art 24A complied, GAAR can be invoked? Then why have an LoB Clause at all? No such clause in Mauritius or Cyprus PRAVIN P. SHAH & Co., CA's 43

44 PRAVIN P. SHAH & Co., CA's 44

45 Factor Mauritius Singapore Cyprus Netherlands Shs bought before Shs bought after & sold before Shs bought after & sold after Nil CGT in India whenever sold 50% of CGT in India Full CGT in India Nil CGT in India whenever sold 50% of CGT in India Full CGT in India Nil CGT in India whenever sold Full CGT in India Full CGT in India CG only N But taxable in I if: Seller owns 10% or more stake & Sale to Indian Res Above NA if: Gains in Corp. reorgn, M / D; & Buyer / Seller own 10% of Capital of the Other Tax on Interest 7.5% 15% 10% 10% PRAVIN P. SHAH & Co., CA's 45

46 What if Original Shares in Ico Bought before but Bonus Stock Split Shares on Merger by Transferee ICo Shares on Demerger by Resulting ICo. All issued after ? Would Grandfathering be available under Mauritius / Singapore / Cyprus Treaties? PRAVIN P. SHAH & Co., CA's 46

47 Factor Mauritius Singapore Cyprus Netherlands Indirect Transfer Provisions No Clause for taxing Indirect Transfers ~ South Africa / USA/UK / Israel Not applicable to Treaty countries Sanofi Pasteur (AP) and FM s Speech on FB 2012 Same Same Same PRAVIN P. SHAH & Co., CA's 47

48 Majority DTAAs Do Not Contain such Provisions IHC remains a Foreign Co. even under Expln. to s.9 Only Deemed to be situated in India - Does nt become Indian Co DTAA Art 13(5) / (6) deals with Other Property Not shares of Indian Co. Not shares of Imm. Prop. Co. Other Assets Always taxable in CoR Hence, under DTAA Indirect Transfers always taxable in CoR Gains from Sale of M /S /C/ N Co. always taxable in M/S/C/N PRAVIN P. SHAH & Co., CA's 48

49 Unlisted Gain Mauritius Singapore Cyprus Netherlands LTCG Shs bought before Apr 2017 LTCG Shs bought after Apr 2017 & sold after Apr 2019 STCG Shs bought after Apr 2017 & sold after Apr 2019 Nil Nil Nil Nil 10% 10% 20% Nil 40% or 30% if FPI 40% or 30% if FPI 40% or 30% if FPI Nil CGT Locally? No No No No if 5% held in Ico FDI % Apr Dec % 20% 2% 7% PRAVIN P. SHAH & Co., CA's 49

50 Anti-Treaty Abuse Measures in India s DTAAs - 40 LOB: Specific Quantitative based Rule - Objective Principal Purpose Test or PPT: General Qualitative Rule, Subjective, case-by-case review India s DTAA contains different types of Measures Objective LOB + PPT : 11 DTAAs Mauritius, Singapore, Iceland, Sri Lanka, Romania, Mexico, Uruguay, Tanzania, Tajikistan, Subjective PPT : 28 DTAAs UK, Finland, Norway, Malaysia, Malta, UAE, Thailand, Poland, Indonesia, Taipei, Kuwait, Luxembourg, etc. Objective LOB alone: 1 DTAA USA PRAVIN P. SHAH & Co., CA's 50

51 Where LOB Clause in Treaty No GAAR? Shome Committee Report LOB is SAAR. Hence, cannot substitute by GAAR Comply with SAAR not GAAR Till Circular 789 rules, GAAR cannot examine genuineness of residency claim of NR go by TRC alone If inspite of LOB, evidence of violation of Treaty Revisit Treaty But yet No GAAR PRAVIN P. SHAH & Co., CA's 51

52 Will GAAR be invoked when LOB satisfied? Adoption of Anti-abuse measures in Treaty may not be sufficient to address all Tax Avoidance & GAAR is required for the same If avoidance is sufficiently addressed by LOB No occasion for GAAR Issues Who decides what is sufficient? When would you say that LOB is sufficient? PRAVIN P. SHAH & Co., CA's 52

53 GAAR when FPI / SPV set up in tax friendly jurisdiction? Depends upon main purpose of choice If Jurisdiction of FPI / SPV based on Non-tax commercial considerations and Main Objective not to obtain Tax Benefit NO GAAR Issues Mere compliance with LoB Clause not entirely enough Main Purpose would be checked - subjectivity PRAVIN P. SHAH & Co., CA's 53

54 GAAR to Corporate Actions / Conversions GAAR not applicable to Investments made prior to What happens to Shares issued after arising out of Corporate Actions / Conversions for Investments > ? No GAAR for Bonus / Splits / Consolidation on Original before Shares on Conversion of CCDs / CCPS /FCCBs/GDRs/ADRs acquired before Grandfathering available u/r.10u(1)(d) PRAVIN P. SHAH & Co., CA's 54

55 Factor Mauritius Singapore Cyprus Netherlands LOB for Shs bought before whenever sold? No LOB Yes. Ops Exp. in Singapore S$200,000 in 24 mts. prior to sale of shares No LOB No LOB. GAAR for Shs bought before whenever sold? Investments before grandfathered from GAAR Investments before grandfathered from GAAR Investments before grandfathered from GAAR Investments before grandfathered from GAAR PRAVIN P. SHAH & Co., CA's 55

56 Factor Mauritius Singapore Cyprus Netherlands LOB for Shs bought after but sold before ? GAAR for Shs bought after but sold before ? Express GAAR override? Yes. Ops. Exp. In Mauritius MU15 L in 12 mts before CG. Yes if LOB does not address tax avoidance sufficiently Yes. Ops Exp. in Singapore S$200,000 in 12 mts prior to sale of shares Yes if LOB does not address tax avoidance sufficiently No LOB GAAR applies No Yes. Art 28A No No No LOB. GAAR applies PRAVIN P. SHAH & Co., CA's 56

57 Factor Mauritius Singapore Cyprus Netherlands LOB / GAAR for shares sold from Irrelevant since full CGT in India Source based Irrelevant since full CGT in India Source based Irrelevant since full CGT in India Source based GAAR till Treaty not amended PRAVIN P. SHAH & Co., CA's 57

58 Gain on sale of shares always taxable as CG Irrespective of frequency / period / quantum No litigation whether CG or Business Income? Eligible for DTAA Benefits in all 4 Nations GAAR Grandfathering for Invst before Mu/Sing/Cy DTAA Grandfathering for Invst before No LOB for M / Cy for Invst before No MAT Indirect Transfers Rules NA for FPI-I or FPI-II PRAVIN P. SHAH & Co., CA's 58

59 Benefit only if gain on sale of shares taxable as CG Frequency / period / quantum Litigation whether CG or Business Income? What if C&M also Transferred? CBDT Cir May 2016 No exemption unlike AIF I and AIF II GAAR Grandfathering for Invst before Q. What if held to be Stock-in-trade does it change the scenario? Mu/Sing/Cy DTAA Grandfathering for Invst before No LOB for M / Cy for Invst before No MAT No Exemption for Indirect Transfers Rules but out because Treaties have no look through / indirect provisions PRAVIN P. SHAH & Co., CA's 59

60 Should IHCs / Funds / FPIs migrate to Holland? Tax in Netherlands only if less than 10% held in Ico OR 10% or more but sold to non-indian Resident FPIs cannot hold more than 10% of an Ico under SEBI Regs No LoB Clause in Dutch Treaty Q. Would migration attract GAAR? CBDT No GAAR If Jurisdiction choice on Non-tax commercial considerations and Main Objective Not to obtain Tax Benefit But for New Structures worth considering! Also consider Spain and France!! PRAVIN P. SHAH & Co., CA's 60

61 PRAVIN P. SHAH & Co., CA's 61