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International Taxation Demystifying the cross border taxation tangle. Narayan Mehta Partner, Sudit K. Parekh & Co. JB Nagar CPE Study Circle, 12 th July 06. Agenda. Introduction to DTAA Specific treaty provisions with practical case studies Business income Dividends / Interest

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international taxation demystifying the cross border taxation tangle

International TaxationDemystifying the cross border taxation tangle

Narayan Mehta

Partner, Sudit K. Parekh & Co.

JB Nagar CPE Study Circle, 12th July 06

agenda
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…
causes of double taxation
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!

double taxation convention objectives
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
treaty override
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!

article 1 scope of the convention
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

article 2 taxes covered
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

article 4 residence
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

Article 4 – Residence

Residence – Steps for Determination

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

Article 5 – Permanent Establishment
case study minimizing indian tax
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

article 7 business profits
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 arm’s length
  • Consistent method to be followed

every year

  • Not applicable if items covered under

different Articles

attribution of profits to po a case study
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

the operating model
The Operating Model

Work done:

Drawings /

Designing /

Engineering

X Inc.

(US)

Y AS.

(Norway)

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

practical considerations
Fiscal year – 1st April to 31st March

Y AS’s 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

Surveyor’s 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

Practical Considerations
article 10 11 dividends interest
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
article 12 royalties fts
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

check protocols to treaty
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!
mfn clause in dutch treaty
MFN Clause in Dutch Treaty

If after the signature of this Convention[1] 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

original text of dutch treaty
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
favorable treaties since 1990
Favorable Treaties since 1990
  • US treaty 18 Dec 1990
  • German treaty 26 Oct 1996
  • Swedish treaty 25 Dec 1997
lease payments
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
technical services
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
interior design projects a case study
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

payment of management fees
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%!

section 195 section 197 certificate
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
section 195
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
magnesium sinter plant a case study
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 @ 30% gross
tax refund relating to fts
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 !
articles 14 independent personal services
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 >= 60 / 90 / 183 days; or
  • IPS deleted in OECD MC –

2000 Update

articles 15 dependent personal services
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 >= 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

some interesting issues in relation to expatriate taxation
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
article 21 other income
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

check if the treaty is in effect
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
ensure that the treaty has not terminated
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!

approaches for elimination of double taxation
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
methods of granting tax credits
Exemption Method

Credit Method

Methods of Granting Tax Credits

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

tax credits full exemption
Tax Credits – Full Exemption

The income earned in the State of source is fully

exempt in the state of residence

Old Austria Treaty, Greece

tax credits exemption with progression
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

tax credits full credit
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

tax credits ordinary credit
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

underlying tax credit utc
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
tax sparing ts
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
tax sparing ts55
Tax Sparing (TS)
  • TS is normally confirmed to specific categories of income
    • Interest Income [Sec. 10(15)], Export Income [Sec. 80HHC]A, Industrial profits [Sec. 80IA], etc.
  • Indian Treaties with some countries providing for TS
    • Japan, Canada, Kenya, Malaysia, Cyprus, Singapore, etc.
tax sparing ts case study 1
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

Domesticsale

Exports- Nil tax

Domestic sales - 33.66%

Indian Subsidiary

ecb tax sparing benefits

Hong Kong

UK

Tax on interest

0%

33%

Tax exemption u/s 10(15)

Yes

Yes

Tax sparing credit

N.A.

15%

Net tax paid

0%

18%

ECB – Tax Sparing Benefits
optimizing ecb tax sparring benefits
Optimizing ECB Tax Sparring Benefits

Dividends

B Co

(Mauritius)

B Co

(Holland)

Interest

Interest

X Co

unilateral tax credit
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

unilateral tax credit60
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

entry vehicles
Entry Vehicles

Projects

Others

Project off

Liaison off

Branch off

Subsidiary/

Joint Venture

liaison representative offices
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 @ 5-10% of expenses
  • Need to check the immigration laws of the overseas country before setting up LO there
project office
Project Office

Indian

HO

India

……………………………………………………………………………….

Netherlands

If duration of project is less than six months, - no PE and not taxable in Netherlands@ 30.5% but taxable in India @ @33.66%

If profits taxed

in Netherlands,

taxable

in India but credit for

Dutch taxes available.

Dutch

Project

branch v s subsidiary
Branch

Simplicity of formation and administration

Indian co’s assets exposed to foreign liabilities

Subsidiary

Enjoys local credence and patronage

Stock options possible, more autonomy

Can form branches elsewhere

Branch v/s Subsidiary
branch v s subsidiary67
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

Branch v/s Subsidiary
branch
Branch

Indian

Parent Co

No force of attraction rule

  • 33.66% tax
  • Credit for Dutch taxes allowed (Art.23)

India

……………………………………………………………………………….

Profits

0% w/tax

Netherlands

Dutch Branch

(trading in

elec. goods)

Trading in

similar goods

30.5% tax

wholly owned subsidiary
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

0% w/tax

30.5% Dutch tax

cash flows of dividends into india
Cash Flows of Dividends Into India

Indian

Parent co

Debt

Equity

Dutch

WOS / JV

minimizing tax incidence in wos
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
advantage of using debt equity
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 arm’s length interest rates for loans
interposing a holding company
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
levels of international tax planning in outbound investments
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

interposing a holding company75
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

selection of holding company jurisdiction case study 1
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
selection of holding company jurisdiction case study 1 contd
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
selection of holding company jurisdiction case study 1 contd78
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
selection of holding company jurisdiction case study 1 contd80
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
outbound investments case study 2
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%
one of the options ohq structure
One of the Options – OHQ Structure

Mau Co

UK Co

Sing OHQ

Neth Co

Thai Co

Indian Co

HK Co

Philip Co

singapore ohq
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
tax effect
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
establishing a trading co in europe case study 3
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

restructuring us european investment case study 4
RestructuringUS / 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

objectives
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
issues
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 !
what is lob clause
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
potential holding co locations
Austria

Belgium

France

Germany

Luxembourg

Netherlands

Spain

Switzerland

Denmark

UK

Cyprus

Malta

Madeira

Labuan

Potential Holding Co Locations
1a madeira trading co
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

1b madeira trading uk holding co
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

2 swiss holding co
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

conversion from branch into wos
Conversion from Branch into WOS

Phase II

conversion

Dutch

WOS

Dutch

Branch

  • 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

slide95

Equip Roy - 10%

Roy / FTS / Mgt fees – 10%

Interest - 10% / 15%

Dividends – 14.025%

Comm. - 0%

Director fees - 30%

Profit Extraction Techniques

Taxable base in India could also be minimized based on suitable transfer pricing policy!

inward foreign investment regulations
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
entry vehicles98
Entry Vehicles

Projects

Others

Project off

Liaison off

Branch 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
inbound investments a case study
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%
indian branch through denmark co
Indian Branch through Denmark Co.

billing

Italian

Clients

  • 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%!

what is international tax planning
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

why is international tax planning necessary
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
international tax planning requires an integrated holistic approach
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
case study 1 restructuring the indian overseas operations to achieve commercial tax considerations
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

acquisition equity swap
Acquisition – Equity Swap

UK Co

UK shareholders

Exempt

Capital Gains

100%

49% equity

Indian

Co

Indian

shareholders

51% equity

acquisition equity swap107
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!
the operating pricing model formulated
Software

development

Brand creation

Entrepreneurial

risk

The Operating / Pricing Model Formulated

Rest of the profits!

Cost plus 11% only!

Consideration ?

Indian tax

rate=0 / 33%

UK tax

rate= 10/30%

Transfer Pricing issues!

Indian

Co

UK

WOS

Contract for outsourcing

Principal contract

for software development

Deputation / secondment

of personnel

for onsite execution

Contract value UK £ 100

Ultimate

UK

client

end results
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

case study 2 offshore licensing
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

Germany

Netherlands

Royalties payments

W/tax 0%

USA

W/tax 0%

Overall tax rate reduced substantially from 40% to less than 15%!

* Non-domiciled

case study 3 investment into russia
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

case study 4 german investment
Case Study 4- German Investment

Dividends

GmbH

Reinvest

as capital

Holding co

Indian co

Reduces tax rate from 40%

To 30%

case study 5 strategic investment into an israeli co
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

case study 6 hybrid securities
Case study 6- Hybrid Securities

Dutch co

Pref shares treated as debt

under certain conditions !

Preference Shares

Indian co

Dividend income

recent trends in international tax
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
concluding remarks
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
thank you
Thank You

?

Queries

Narayan Mehta

Tel: +91 22 22821141

Mobile: +91 9820544495

E-Mail: narayan.mehta@skparekh.com