IFA Technical Session India: Tax and Foreign Investors

1. IFA Technical SessionIndia: Tax and Foreign Investors Nikhil V Mehta Gray’s Inn Tax Chambers nm@taxbar.com 7th March 2013

2. A Snapshot of 2012 • 20th January: Vodafone win in the SC decision • 17th February: Indian Government files review petition • 9th March: Parliamentary Standing Committee on Finance’s Report on the DTC recommends relaxations to the proposed Vodafone tax charge and the GAAR • 16th March: Indian Budget contains provisions to tax offshore share sales with retrospective effect from 1st April 1962, and introduces the GAAR from 1st April 2012 • 20th March: The Supreme Court dismisses the review petition • 28th May: Finance Act enacted with retrospective changes: Committee’s recommendations ignored. Vodafone back in play. GAAR becomes law but from 1st April 2013 • 1st August: P. Chidambaram becomes FM • 30th September: Shome Committee’s Final Report on the GAAR • 31st October: Shome Committee’s Final Report on Indirect Transfers

3. The Tax Landscape at the End of 2012 • Uncertainty • Aggression of Tax Authorities • Independence of the Courts • Cautious Optimism with new FM

4. Developments in 2013 • Shell • Sanofi • Budget

5. Shell • In 2009, injection of additional equity from Dutch parent into Indian subsidiary • Cash paid on basis of Rs.10.00 per share • In January 2013, Indian tax authorities claimed gross undervalue of shares and, using transfer pricing, valued shares at Rs. 183 per share • In US$ terms, the undervalue in total is @2.7bn: claim is for @US$ 1bn • Tax on FDI through transfer pricing

6. Sanofi • In August 2009, 2 French Companies sold shares in a French holding company to Sanofi • The holding company held 80% of the shares in an Indian pharma company, SBL • The Indian tax authorities attempted to tax the sale as an indirect transfer of the shares of SBL • They further argued that the retrospective changes applied and overrode treaties • Sanofi, like Vodafone, was exposed because it failed to withhold tax from the purchase price

7. Sanofi (continued) • Decision by the Andhra Pradesh High Court went against the tax authorities • Vodafone followed in part, including domestic and foreign case-law on tax avoidance (Tower MCashback referred to in judgment) • Tax authorities criticised for their arguments on looking through commercial substance of a bona fide JV company (“ambivalent or incoherent”)

8. Sanofi (continued) • An odd approach to France/India treaty by Indian tax authorities to overturn France’s exclusive right to tax what was ostensibly a domestic French sale of shares • Application of extended meaning of “transfer” in retrospective provisions to “alienation” of shares representing “participation” in a company: Article 14(5) of the Treaty • Court clearly not prepared to contemplate that a domestic retrospective provision could override a treaty • No attempt to argue that what was taxable in France was not the same as what was taxable in India

9. Budget 2013-2014 • Focus on increasing the tax take without dramatic increases • Further measures to curb tax avoidance • For foreign investors, what’s not in the Budget is more interesting than what is in it

10. Increasing the Tax Take • Taxing the “super-rich” by increasing surcharges on income tax to following rates: • 10% on individuals earning more than Rs. 1 crore per year (@£112,000): 42,000 taxpayers in this bracket • Also 10% on domestic companies earning more than Rs. 10 crores (@£1.12m) and 5% for foreign companies • Increasing withholding tax on royalties from 10% to 25%

11. Anti-Avoidance • 20% distribution tax on unlisted share buybacks with effect from 1st June 2013 • Tax residence certificates no longer conclusive for treaty claims (but no guidance on what else may be needed)

12. More positively, for portfolio investors… • Simplification of regulatory procedures • Investment in exchange-traded derivatives up to Rs. Exposure • Ability to put up corporate and Government bond investments as margin • Reductions in securities transaction tax on exchange deals

13. Improvements in the GAAR • Shome Committee Report’s recommendations accepted in part • Postponement to 1st April 2016 confirmed but NB it applies from 1st April 2015 • Factors constituting an “impermissible avoidance arrangement” clarified • Approving Panel will have tax administration in minority • Procedural improvements

14. Retrospective Changes • “Property” deemed always to have included any rights relating to an Indian company including rights of management • “Transfer” expanded to include any way of parting with an asset, directly or indirectly notwithstanding that it is legally achieved by a direct transfer of foreign shares • But even foreign shares are deemed always to have had an Indian situs if they derive their value from Indian shares • Withholding by non-residents deemed always to have been necessary

15. Retrospective Changes (contd.) • Despite endorsing the importance of certainty, the Finance Minister has remained silent in the Budget on the status of the retrospective changes: no mention of the Shome Committee’s recommendations • Something may come in the Direct Taxes Code Bill • An anti-climax

16. Trends • Contradictions between Government pronouncements and Indian tax authorities’ conduct: attack on tax avoidance based on mindset of tackling tax evasion • Attack on mutinationals-India’s own version of Starbucks: transfer pricing a particularly thorny area • But the Courts continue to defend legitimate tax planning • Defensive tax planning pre-GAAR

17. Incredible !ndia