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International Taxation Demystifying the cross border taxation tangle

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International Taxation Demystifying the cross border taxation tangle Narayan Mehta Partner, Sudit K. Parekh & Co. JB Nagar CPE Study Circle, 12th July 06 – PowerPoint PPT presentation

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Title: International Taxation Demystifying the cross border taxation tangle


1
International TaxationDemystifying the cross
border taxation tangle
Narayan Mehta Partner, Sudit K. Parekh Co. JB
Nagar CPE Study Circle, 12th July 06
2
Agenda
  • Introduction to DTAA
  • Specific treaty provisions with practical case
    studies
  • Business income
  • Dividends / Interest
  • Royalties / FTS
  • Independent / Dependent personal services
  • Other incomes
  • Elimination of double taxation
  • Outbound investments
  • Inbound investments
  • International tax planning- how
  • undertaken in practice?
  • Way forward

3
Introduction to DTAA
4
Causes of Double Taxation
  • One state claims to tax on the basis of Source
    of Income another on the basis of Residence
  • OR
  • Both states claim to tax incomes based on
    Residence

Hence the need for
elimination of Double taxation!
5
Double Taxation Convention - Objectives
  • To protect tax payers from Double Taxation
  • To encourage free flow of International Trade
    investment
  • To encourage transfer of technology
  • To prevent discrimination between tax payers
  • To provide a reasonable level of legal and fiscal
    certainty to investors and traders
  • To arrive at acceptable basis to share tax
    revenue between the states

6
Treaty Override
  • In cross-border tax scenario
  • The assessee can avail the benefit of bilateral
    agreements between contracting state
  • OR
  • The assessee can choose to be governed by the
    Indian tax laws
  • Whichever is more beneficial
  • to the tax-payer!

7
Overall Structure of DTAA
8
Specific Treaty Provisions
9
Article 1 Scope of the Convention
  • To Whom Does the Treaty Apply?
  • Article 1 provides for application of tax treaty
    to persons resident of one or both the
    contracting states
  • Hence it does not apply to persons who are not
    residents of any of the contracting states
  • Persons defined in Article 3 of
  • the model convention to include
  • an individual / company / any
  • other taxable entity

10
Article 2 Taxes Covered
  • Applies to income and capital
  • Taxes assessed directly also taxes which are
    withheld at source
  • Tax calculated as supplementary levies and
    surtaxes are also covered
  • All Non-Government taxes, dues, duties etc are
    not covered
  • Indirect taxes are not covered
  • by DTAA

11
Article 4 Residence
Residence Steps for Determination
  • Residence under domestic law
  • Domicile
  • Residence
  • Place of management
  • Any other criterion of similar nature
  • Tie breaker test individuals
  • Permanent home
  • Centre of vital interest
  • Habitual abode
  • Nationality
  • MAP
  • Tie breaker test Others
  • Place of effective management

12
Article 5 Permanent Establishment
  • Fixed place PE
  • Place of management
  • Branch
  • Office
  • Factory
  • Workshop
  • Mine / oil / gas well / quarry / any other place
    of extraction of natural resources
  • Construction/ Installation PE
  • Building site
  • Construction
  • Assembly / installation / supervision in this
    connection
  • Service PE
  • Dependent Agency PE

13
Case Study Minimizing Indian Tax
  • Transaction structured to legitimately avoid Y Co
    from having a PE in India
  • Location selection of Y co examined from Belgian
    Indian angles

X Co (Belgium)
Y co (Mauritius)
Indian PE
75 of work sub-contracted
14
Article 7 Business Profits
  • Taxation of profits only by state of residence
  • Taxation by source country allowed only to the
    extent profits are attributable to a PE of the
    enterprise therein
  • Therefore, profit attribution absolutely
    essential
  • HO and PE deemed to be separate and distinct
    enterprises operating independently
  • Check if the treaty has force of attraction
    rule!
  • Expenses incurred for business of
  • the PE deductible
  • Therefore, only net profits to be taxed
  • Use of customary proportionate
  • method allowed
  • However, results should be at arms length
  • Consistent method to be followed
  • every year
  • Not applicable if items covered under
  • different Articles

15
Attribution of Profits to PO- a Case Study
Sub-contract Price INR USD
X Inc. (US)
Y AS (Norway)
Ship lift system to be done by X Inc
Ship transfer system
Shiplift Ship transfer System within 3 years
of the contract signing
Contract Price INR USD
Indian Navy
16
The Operating Model
Work done Drawings / Designing / Engineering
Y AS. (Norway)
X Inc. (US)
US payments
Repatriation of surplus on Completion of project
Work done Local assembly through local vendors
PO
PO
INR payments
Indian Navy
US payments
INR payments
17
Practical Considerations
  • Fiscal year 1st April to 31st March
  • Y ASs Permanent establishment (PE) under India
    / Norway tax treaty constituted
  • Attribution of profits to head office
  • No prescribed methods- fact sensitive
  • Methods to attribute profits to various business
    activities
  • Resources deployed as a basis of attribution
  • Salaries paid / costs incurred as basis of
    profits attribution
  • Others based on facts
  • Surveyors certification of work done
  • Terms of contract, price list, etc
  • Computation of profits for each contract period
  • Method of accounting - Completion v/s Completed
    contract Method?
  • Coordinate method with accounting policy followed
    by head office !
  • General administrative and Head office expenses
    upto 5 of total income
  • Corporate tax 40 on net profits attributable
    to PE plus 5 surcharge for 2002-2003

18
Article 10 11 Dividends Interest
  • Taxation primarily by state of residence of
    recipient
  • Participation exemption in certain countries for
    dividends
  • Taxation by source country limited to a certain
    percentage (generally 5 15)
  • If interest / dividend connected with PE in
    source country, Article 7 applies
  • Net basis of taxation in such a case
  • Interest paid to AE must be at ALP

19
Article 12 - Royalties / FTS
  • Exclusive right of taxation to state of residence
  • Country of source may retain the right to deduct
    withholding tax
  • Definition of FTS restricted to FIS in some
    treaties (for instance, India US treaty)
  • Thus, FTS not taxable, if they do not
  • make available- Technical knowledge,
  • Experience, Skill, Know-how, Process
  • Consist of development and transfer of
  • technical plan / design
  • If Royalty / FTS connected with PE in
  • source country, Article 7 applies
  • Royalty / FTS paid to AE must be at
  • ALP

20
Check Protocols to Treaty!
  • Protocols / MOUs
  • Generally provide amendments to the existing
    treaties
  • Provide for explanations to the treaty provision
  • Check whether the treaty / protocol has the MFN
    Clause!

21
MFN Clause in Dutch Treaty
  • If after the signature of this Convention1
    under any Convention or Agreement between India
    and a third State which is a member of the OECD
    India should limit its taxation at source on
    dividends, interest, royalties, fee for technical
    services or payments for the use of equipment at
    a lower rate or scope provided for in this
    Convention on the said items of income, then, as
    from the date on which the relevant India
    Convention or Agreement enters into force the
    same rate or scope as provided for in that
    Convention or Agreement on the said items of
    income shall also apply under this Convention.
  • 1 The Dutch treaty was signed on 30
    July 1988


22
Original Text of Dutch Treaty
  • 20 w/tax on royalties and fees for technical
    services
  • Broad scope of royalties and fees for technical
    services
  • Most favored nation clause (MFN) for royalties
    and fees for technical services, interest and
    dividends

23
Favorable Treaties since 1990
  • US treaty 18 Dec 1990
  • German treaty 26 Oct 1996
  • Swedish treaty 25 Dec 1997

24
Lease Payments
  • Gross w/tax of 20 wipes out margins on cross
    border leases
  • Payments on cross border leases no longer taxable
    in India due to Swedish treaty
  • Fillip to Dutch leasing industry

25
Technical Services
  • Certain technical services taxable
  • make available technical knowledge
  • Development and transfer of a technical plan or
    design
  • Are ancillary to the royalty payments
  • Other services not taxable
  • Ancillary to rental of ships, aircraft, etc.
  • Independent personal services

26
India- Netherlands Treaty
27
India- France Treaty
28
India- Sweden Treaty
29
India- Spain Treaty
30
Interior Design Projects- A Case Study
  • Interior design project mgt co based in HK
    Singapore sets up Indian subsidiary
  • Lands up lucrative contracts in India
  • Objective Minimize Indian taxes
  • Management fees/ FTS
  • Royalties
  • Commission
  • Payments can be made to
  • Singapore, Malaysia or HK
  • subs

31
Payment of Management Fees
FIPB issue !
A Co (Singapore)
26
15
0
X Co (India)
10
B Co (Malaysia)
0
20
C Co (HK)
0
Overall tax rate reduced from 26 to only 10!
32
Section 195 / Section 197 Certificate
  • Section 195(2)
  • Payer can apply to determine appropriate portion
    of the sum chargeable to tax and liable for
    withholding
  • Section 195(3)
  • Non-resident can make an application to the
    assessing officer for grant of a certificate for
    Nil withholding tax rate
  • Section 197
  • Payee can apply for NIL or lower deduction of Tax
    certificate

33
Section 195
  • Time of Deduction
  • Credit or payment whichever is earlier
  • Section to not apply if sums paid are not
    chargeable to tax
  • CPA Certificate / certificate from tax office in
    appropriate cases

34
Magnesium Sinter Plant- A Case Study
  • Sale of magnesium sinter plant by Austrian co for
    Indian co
  • Supervision of erection also undertaken
  • Technical service payments made to Austrian co
  • Tax withheld _at_ 30 gross

35
Tax Refund relating to FTS
  • Tax refund was claimed
  • Classifying payments as reimbursement of expenses
    rather than payment of FTS
  • Detailed examination of all evidences and
    conferences with Austrian auditors re the
    evidence of reimbursement
  • More than 25 visits to the tax offices !

36
Articles 14 Independent Personal Services
  • IPS (Income from Independent personal services)
  • Primary right to tax state of residence
  • Source state also has right to tax only if
  • If he has a fixed base regularly available to him
    in the other state for performing his activities
  • Stay gt 60 / 90 / 183 days or
  • IPS deleted in OECD MC
  • 2000 Update

37
Articles 15 Dependent Personal Services
  • DPS (Income from Employment)
  • Primary right to tax state of residence
  • Source state also has right to tax only if
  • Stay gt 183 days or
  • Remuneration paid by or on behalf of employer
    resident in source state or
  • Remuneration borne by PE of the
  • employer in source state
  • Remuneration in respect of
  • employment aboard ship /
  • aircraft place of effective
  • management

38
Some Interesting Issues In Relation To Expatriate
Taxation
  • Determination of Residential Status of the expat
    when different years are followed for tax purpose
    in home and host country?
  • Taxability of Living allowance paid to the
    expatriates in India Whether exemption under
    section 10(14) of ITA?
  • Taxability of Social Security Contributions made
    abroad in India?
  • Taxability of Salaries for services rendered
    partly in India and partly for other countries
    Possibility of Split Contract?
  • Exposure to Service PE in India- Morgan Stanley
    Ruling!
  • Exposure to FBT in India for foreign company

39
Article 21 Other Income
  • Income not covered by other paragraphs covered
    here
  • Generally, exclusive taxation by country of
    residence of recipient
  • Some treaties do provide for source based
    taxation
  • Place where income arises not relevant
  • Computation of taxable income based on domestic
    laws
  • Article applies only where there is no
  • PE in source state

40
Check if the treaty is in effect!
  • Entry into force check for each of the
    countries,
  • The Date of Entry into force of the convention
  • The Date of Effect of the convention

41
Ensure that the Treaty has not terminated!
  • Treaty remains into force till terminated
  • Some treaties provide for a period during which
    treaty cannot be terminated
  • Termination requires notice through diplomatic
    channels
  • Some treaties provide for period
  • of notice and some do not
  • Check if the treaty is in force
  • before applying it!

42
Approaches for Elimination of Double Taxation
  • Bilateral Agreements between Contracting states
  • Section 90 provides for tax relief in accordance
    with treaties executed by India
  • Unilateral Tax credit Foreign tax credit system
  • Section 91 provides relief where no treaty exists

43
Methods of Granting Tax Credits
  • Exemption Method
  • Credit Method

Full Exemption
Exemption with Progression
Full Credit
Ordinary Credit
State of residence allows credit of tax paid in
the state of source Restricted to that part of
the income-tax which is attributable to the
income, taxable in the state of residence
Total tax paid in the state of source is allowed
as a credit against any tax payable in the
state of residence
Income earned in the state of source
is considered in the state of residence only
for rate purpose
The Income earned in the state of source is
fully exempt in the State of residence
44
Case Study
45
Tax Incidence if No Double Tax Elimination
46
Tax Credits Full Exemption
The income earned in the State of source is
fully exempt in the state of residence
Old Austria Treaty, Greece
47
Tax Credits Exemption With Progression
The income earned in the State of source is
considered in the state of residence only for
rate purpose
Australia, Cyprus, Germany (Indian Income), UK,
Malta
48
Tax Credits Full Credit
Total tax paid in the state of source is allowed
as a credit against any tax payable in the state
of residence
Germany, Canada, Singapore, Sweden
49
Tax Credits- Ordinary Credit
State of residence allows credit of tax paid in
the state of source Restricted to that Part of
the income-tax which is attributable to the
income, taxable in the state of residence
Most Indian Treaties i.e. Australia, Cyprus,
Denmark, UK, USA, France, Japan, Mauritius
50
Tax Impact at a Glance
51
Amount of Tax Given Up by State of Residence
52
Underlying Tax Credit (UTC)
  • Provides relief from tax on same income, which
    has already suffered tax in the form of corporate
    profits tax
  • Pre condition Certain percentage of share held
    by recipient in the capital of the payer company
  • DTAA entered into by India do provide for UTC by
    other state Illustratively USA, UK
  • DTAA with Mauritius Singapore cover UTC in both
    the countries

53
Underlying Tax Credit (Example)
54
Tax Sparing (TS)
  • Benefits of low tax rate in source country
    accrues to the country of investor rather than to
    the investor
  • Doctrine of tax sparing overcomes this
    limitation
  • State of Residence allows credit for deemed tax
  • Resident State allows credit on deemed basis at
    the rate applicable in Source State even though
    the income is exempt

55
Tax Sparing (TS)
  • TS is normally confirmed to specific categories
    of income
  • Interest Income Sec. 10(15), Export Income
    Sec. 80HHCA, Industrial profits Sec. 80IA,
    etc.
  • Indian Treaties with some countries providing for
    TS
  • Japan, Canada, Kenya, Malaysia, Cyprus,
    Singapore, etc.

56
Tax Sparing (TS) Case Study 1
Singapore Parent Co
Tax sparring UTC available - no further tax on
div
Dividend
Exports
14.025 - Div dist tax
Equity Debt
Domestic sale
Exports- Nil tax Domestic sales - 33.66
Indian Subsidiary
57
ECB Tax Sparing Benefits
58
Optimizing ECB Tax Sparring Benefits
Dividends
B Co (Mauritius)
B Co (Holland)
Interest
Interest
X Co
59
Unilateral Tax Credit
  • Requirements
  • Resident of India for relevant previous year
  • Income has accrued or arisen outside India and is
    doubly taxed
  • Taxes have been paid in the source country
  • There is no DTAA with that country
  • Items of Income not covered under
  • DTAA eligible for credit

60
Unilateral Tax Credit
  • Relief
  • Deduction from the Indian income-tax payable by
    him of a sum calculated on
  • such doubly taxed income at the Indian rate of
    tax
  • OR
  • the rate of tax of the said country,
  • whichever is the lower,
  • OR
  • the Indian rate of tax if both the rates are
    equal

61
Outbound Investments
62
Entry Vehicles
Others
Projects
Liaison off
Branch off
Project off
Subsidiary/ Joint Venture
63
Liaison / Representative Offices
  • Useful to test the markets
  • Purchasing offices, collecting information, etc.
  • Wider range of activities could be carried out
    through
  • Coordination centers
  • Generally taxed _at_ 5-10 of expenses
  • Need to check the immigration laws of the
    overseas country before setting up LO there

64
Project Office
Indian HO
India
.
Netherlands
If duration of project is less than six months, -
no PE and not taxable in Netherlands_at_ 30.5
but taxable in India _at_ _at_33.66
If profits taxed in Netherlands, taxable in India
but credit for Dutch taxes available.
Dutch Project
65
Choice of Entity Formation - Branch v/s
Subsidiary
66
Branch v/s Subsidiary
  • Branch
  • Simplicity of formation and administration
  • Indian cos assets exposed to foreign liabilities
  • Subsidiary
  • Enjoys local credence and patronage
  • Stock options possible, more autonomy
  • Can form branches elsewhere

67
Branch v/s Subsidiary
  • Branch
  • Foreign clients may not be comfortable in signing
    contracts with branch
  • Restrictions on borrowing
  • Deferral option not available- however overall
    tax incidence lower
  • Subsidiary
  • Double tax impact in subsidiary
  • However possible to defer Indian tax liability by
    not declaring dividends

68
Branch
Indian Parent Co
No force of attraction rule
  • 33.66 tax
  • Credit for Dutch taxes allowed (Art.23)

India
.
Netherlands
Profits 0 w/tax
Dutch Branch (trading in elec. goods)
Trading in similar goods
30.5 tax
69
Wholly Owned Subsidiary
  • 33.66 tax
  • Credit for w/taxes available

Indian Parent co
Debt
Equity
India

Netherlands
Dividends 10 div w/tax
0.55 cap tax
Royalties, FTS/Int
Dutch WOS / JV
30.5 Dutch tax
0 w/tax
70
Cash Flows of Dividends Into India
Indian Parent co
Debt
Equity
Dutch WOS / JV
71
Minimizing Tax Incidence in WOS
  • Deferring declaration of divs to India
  • Use of suitable debt / equity ratio
  • Use of a holding company to park funds abroad
  • Profit extraction techniques

72
Advantage of Using Debt Equity
  • Only equity means that the investment is locked
    in WOS
  • Use of debt is useful to repatriate part of the
    initial capital to India
  • Also interest is tax deductible expenditure
  • May be able to use redeemable preference shares
    in addition to enable tax free repatriation of
    capital
  • Use arms length interest rates for loans

73
Interposing a Holding Company
  • Direct investments into Target Country
  • May not be the most tax-efficient route
  • Interposing a Holding Company
  • Needs to be examined in greater details, based on
    precise facts of the case

74
Levels of International Tax Planning in Outbound
Investments
Indian corporate tax on Canadian income
India
Withholding tax on distributions
Equity
Income
Canadian corporate tax
Canada
Royalty/FTS/Mgt. fees/Comm./Int.etc
75
Interposing a Holding Company
  • To shelter profits of Canadian co. from Indian
    tax
  • To reduce w.tax /dist tax on dividends
  • To reduce/defer Indian tax on Canadian dividends
  • To avoid capital gains in Canada on sale of
    shares in Canadian WOS
  • To reduce/defer tax in India on capital gains on
    sale of shares in Canadian WOS
  • Use as an extraction base company for management
    charges, admin fees, etc.
  • Others
  • Raising of group finance
  • accumulating profits in stronger currency
  • use of Bilateral Investment Protection Treaty

India
Country X
Canada
76
Selection of Holding Company Jurisdiction
Case Study 1
  • Selection of Holding Company jurisdiction for a
    very reputed Indian company
  • Investment into 12-15 Target Jurisdictions
  • Mandate Identification of potential Holding
    Company jurisdictions with favourable tax regime

77
Selection of Holding Company Jurisdiction Case
Study 1 (Contd.)
  • Favourable Holding Company Jurisdictions
  • Traditional tax havens
  • Isle of Man, Channel Islands, British Virgin
    Islands, Malta, Mauritius, Cyprus, Gibraltar,
    etc.
  • Participation exemptions
  • Austria, Belgium, Denmark, Netherlands,
    Luxembourg, Spain, Sweden, Switzerland, United
    Kingdom
  • Territorial system
  • Singapore

78
Selection of Holding Company Jurisdiction Case
Study 1 (Contd.)
  • Comparison of Holding Company jurisdictions
    across various Criteria
  • Withholding tax rates for Div, Int, Royalty
  • Corporate Tax Rates
  • Anti Avoidance provisions
  • OECD Report on Harmful Tax Competition
  • Capital Tax / Registration Tax
  • Withholding tax rate on Dividends
  • Fiscal unity provisions
  • Minimum Share Capital requirement
  • Local / State Taxes payable
  • Availability of Carry Forward of Losses
  • Flexibility of reusing it as re-export hub

79
European Holding Company - A Comparison
80
Selection of Holding Company Jurisdiction
Case Study 1 (Contd.)
  • Precautions in holding company selection
  • Establishing substance in the Holding Company
  • Management Control and place of effective
    management
  • Adherence with exchange control regulations

81
Outbound Investments- Case Study 2
  • Indian co establishing subs in Mauritius, HK, UK,
    Philippines Thailand thru direct holding
  • If held directly the Indian tax rate on
    dividends was 35

82
One of the Options OHQ Structure
UK Co
Mau Co
Sing OHQ
Neth Co
Thai Co
Indian Co
Philip Co
HK Co
83
Singapore OHQ
  • Actually provides management, technical or other
    supporting services to subsidiaries
  • Minimum equity of 0.5m
  • Min 3 subs
  • No capital gains tax
  • Dividends are tax exempt
  • Incentive available for 10 yrs

84
Tax Effect !
  • Tax rate on divs from Mauritius HK dropped to
    9 from 35
  • Tax rate on other divs routed via Netherlands
    dropped to 15 from 35
  • This model could be used for large Indian
    software cos

85
Establishing a Trading Co in Europe Case
Study 3
5.5 tax on 25
5 (not 25)
Mauritius co
Neth Ant Co
Dutch Co
Divs exempt
0
Loan
0
Direct ownership Swiss w/tax rate of 25 Thru
above planning 6.375 tax rate
Swiss co
9 tax on Trading profits
86
Restructuring US / European investment Case
Study 4
30 w/tax on divs
35 corp tax
US Co
0 w/tax on divs
30 corp tax
Mau Co
UK Co
  • 35 corp tax on dividends received
  • No credit for US 30 w/tax

X Co
87
Objectives
  • To reduce w/tax on US dividends
  • To reduce/defer Indian tax on US dividends
  • To reduce tax on European profits reduce/defer
    Indian tax on those profits
  • Reorganize the existing structure
  • Min tax cost
  • Cash flow considerations
  • RBI considerations

88
Issues
  • Reduction of w/tax from 30 to 5 possible only
    thru use of holding companies
  • LOB clause is a constraint
  • Constraint could be removed if holding co also
    conducts active trading operations - however EU
    trading profits may suffer high tax !

89
What is LOB Clause ?
  • Third parties cant use other US treaties
  • Can use, if one of the following tests are passed
  • Ownership test
  • Stock exchange test
  • Active trade or business test
  • Acceptance by competent authority

90
Potential Holding Co Locations
  • Austria
  • Belgium
  • France
  • Germany
  • Luxembourg
  • Netherlands
  • Spain
  • Switzerland
  • Denmark
  • UK
  • Cyprus
  • Malta
  • Madeira
  • Labuan

91
1A Madeira Trading Co
  • Portugal-US treaty does not apply to Madeira Cos
  • Dutch warehouse - not to be a PE
  • Examine whether Madeira Co can invoice certain
    goods/services reduce US Co profits
  • No tax in Madeira
  • Madeira is part of EU

US Co
Tax - deductible payments
Dutch warehouse
Madeira
0 w/tax
Mau Co
92
1b Madeira Trading UK Holding Co
  • UK- IHC - no tax in UK as US taxes can be fully
    credited
  • No LOB clause in current US-UK treaty!
  • No w/tax from UK to Mauritius
  • Caution ! US-UK treaty renegotiated UK may
    impose a w/tax on divs

Dutch warehouse
Madeira
5 w/tax
UK Co
US Co
0 w/tax
Mau Co
93
2 Swiss Holding Co
  • Swiss-US LOB clause most favorable
  • Swiss trading profits taxed at 17 - lower rate
    possible - depends upon US view of LOB clause
  • No tax on divs from US
  • X Co may have to hold directly - due to
    anti-abuse 1962 Swiss decree

US Co
5 w/tax
Swiss Trading Co
Swiss Holding Co
X Co
94
Conversion from Branch into WOS
Phase II conversion
Dutch Branch
Dutch WOS
  • Conditions
  • Transfer of entire business
  • for all-stock deal
  • Sh holding for three years
  • Benefits
  • No cap gains in Netherlands on conversion
  • Branch is preferable in case of initial losses
  • Double deduction of branch losses !!

Phase I
Indian Parent
95
Profit Extraction Techniques
  • Taxable base in India could also be minimized
    based on suitable transfer pricing policy!

96
Inbound Investments
97
Inward Foreign Investment Regulations
  • Automatic Route
  • No prior approval from Government is required
  • Only certain documents need to be filed with
    Reserve Bank of India (RBI)
  • Non-automatic Route
  • Foreign Investment Promotion Board (FIPB)
    approval is required

98
Entry Vehicles
Others
Projects
Liaison off
Branch off
Project off
Subsidiary/JV
  • Mandatory for
  • projects / contracts
  • involving equip
  • services
  • Automatic route
  • Non-automatic route
  • pure liaison work
  • no revenues
  • prior RBI approval
  • no mfg allowed
  • RBI approval

99
Inbound Investments A Case Study
  • A large Italian Software Company wants to invest
    in Indian operations
  • If it invests directly in India through a
    subsidiary, the effective tax rate will be 15.44

100
Indian Branch through Denmark Co.
Italian Clients
billing
  • Corporate tax - 33
  • 95 Participation
  • exemption

Italy
Div
Equity
EU Parent / Sub
W/tax - nil
Denmark Co.
  • Corporate tax 28
  • Effective Tax Nil
  • tax sparing credit-10AA
  • Corporate Tax Nil - 10AA

Cost billing
Indian Branch
Overall tax rate reduced substantially from over
15 to less than 5!
101
International Tax Planning How undertaken in
practice?
102
What is International Tax Planning?
  • It is the art of structuring cross-border
    transactions to ensure
  • Appropriate routing of business activities
    capital flows through co-ordination of domestic
    laws (of home and host country) and tax treaties
    and the use of offshore entities
  • Desired global business objectives are achieved
  • It aims at legitimately minimising
  • the tax bill and maximising the
  • post tax cash flows for the group

103
Why is International Tax Planning Necessary?
  • Growth in international trade and investment
  • Emergence of a global village
  • Complex and conflicting tax systems and national
    objectives
  • Impact of diverse domestic laws and bilateral
    treaties
  • Availability of offshore financial centres or
    Tax Havens
  • No perfect jurisdiction for offshore entities
  • Wide range of international business goals

104
International Tax Planning Requires an
Integrated Holistic Approach!
  • Also involves
  • Commercial considerations
  • Tax optimization
  • Transfer pricing
  • Withholding tax
  • Expatriate taxation
  • Immigration issues
  • EXIM Policy
  • Exchange control
  • Excise Customs Duties
  • Service Tax / VAT
  • Stamp duty
  • STPI issues

105
Case study 1- Restructuring the Indian
overseas operations to achieve commercial tax
considerations
100
UK Co
UK Share holders
Strategic business relationship Outsourcing
software development to Indian Co.
Indian Co
100
Indian Share holders
106
Acquisition Equity Swap
UK Co
UK shareholders
Exempt Capital Gains
100
49 equity
Indian Co
Indian shareholders
51 equity
107
Acquisition Equity Swap
  • Valuations coordination between UK Indian
    valuers
  • FIPB approval
  • RBI approvals after FIPB permission
  • Rollover relief for capital gains available to UK
    shareholders!

108
The Operating / Pricing Model Formulated
Rest of the profits!
Cost plus 11 only!
Consideration ?
Indian tax rate0 / 33
UK tax rate 10/30
Transfer Pricing issues!
Indian Co
UK WOS
Contract for outsourcing
  • Software
  • development
  • Brand creation
  • Entrepreneurial
  • risk

Principal contract for software development
Deputation / secondment of personnel for
onsite execution
Contract value UK 100
Ultimate UK client
109
End Results!
  • Restructuring of the group in a tax efficient
    manner and achieving commercial objectives!
  • Global documentation- killing many birds with one
    stone!
  • Compliance with the UK / transfer pricing
    regulations!
  • Compliance with the Indian transfer pricing
    regulations!
  • Minimum corporate tax incidence in UK!
  • Optimization of section 10A benefits
  • complete tax exemption in India!
  • Compliance with exchange control
  • regulations, STPI norms formulation
  • of expatriate secondment policy

110
Case Study 2- Offshore Licensing
Outsourcing charges / IPR acquisition
IPR Owner Tax rate 2-7
N Antilles
UK ND Individual
R D / IPR
Back-to-back royalties
Licensing IPR
Japan
W/tax 10
W/tax 0
Tax rate 5-7 on Net income based on adv.
ruling
Netherlands
Germany
Royalties payments
W/tax 0
USA
W/tax 0
Overall tax rate reduced substantially from 40
to less than 15!
Non-domiciled
111
Case study 3- Investment into Russia
0
0
Russian co
  • In general in Russia
  • Int w/tax is 15
  • Div w/tax is 15
  • Cap gains tax is 20

0
Cap gains
Int
Divs
Cyprus co
4.25 tax
112
Case Study 4- German Investment
Dividends
GmbH
Reinvest as capital
Holding co
Indian co
Reduces tax rate from 40 To 30
113
Case Study 5 Strategic Investment into an
Israeli Co.
95 tax exemption for Div Cap Gains
C/gains tax-free
Div - w/ tax -15
Belgium
Israel
10 equity invst.
Div W/tax 5 Interest W/tax 10
Equity Debt
The Objective Minimizing cap gains tax on
eventual sale of shares in Israeli Co.
Effective 3 tax
Mauritius
114
Case study 6- Hybrid Securities
Dutch co
Pref shares treated as debt under certain
conditions !
Preference Shares
Indian co
Dividend income
115
Recent Trends in International Tax
  • Transfer Pricing Legislation in India abroad
  • Harmful Tax Competition Report treaty shopping
  • Introduction of CFC legislation among several
    countries
  • Thin capitalization regulations
  • Electronic commerce resultant tax implications
  • Hybrid securities
  • Flow through entities

116
Concluding Remarks
  • Changing legislation
  • Treaty interpretations can be varied
  • Intermediate entity must have substance
  • Anti-avoidance rules
  • Needs coordination with local tax advisers
  • Front-end planning essential (advance rulings)
  • Recognize non-tax factors
  • Can be complex costly evaluate costs, risks
    benefits

117
Thank You
?
Queries
Narayan Mehta Tel 91 22 22821141 Mobile 91
9820544495 E-Mail narayan.mehta_at_skparekh.com
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