Tax Structuring • Tax Structuring is defined as a form into which business or financial activities may be organized to minimize taxation. • An important part of tax structuring is deciding how to set up a business before commencing operations. A business may run as a sole proprietorship, general partnership, limited partnership, corporation or limited company. • International tax structuring means different things to different people—depending upon their responsibilities within a company; but if its done correctly it can relieve (sometimes) onerous financial burdens that can inhibit a company’s development. • An integrated international tax program which takes careful account of all of a company’s tax exposures can free up precious capital that can be redirected to the firm’s long-term benefit.
Issues Underlying Tax Structuring • Tax Residency • Permanent Establishment • Transfer Pricing • Substance • Due Diligence • Anti Avoidance/Abuse/Tax Risk Management • Treaty Shopping/WHT issues
Business Environment Cultural Issues Business Dynamics Accounting treatment Cross Border Transactions Legal & regulatory framework Tax regimes & treaties Identifying and delivering synergies Cross border transaction imperatives
2 Entry Strategy 1 3 Income flows and their taxability Financing options Cross border transactions 4 6 Exit considerations Debt Structuring 5 Cash repatriation Key tax and financial considerations
The Five Questions of Tax Structuring • What should you acquire (assets or shares)? • How should you acquire it (holding company issues)? • How will you pay for it (tax efficient funding)? • How will you use profits (maximizing dividend flows)? • What if things don’t work out (tax efficient exit)?
What should you acquire? • Share Purchase • Asset purchase • Merger, Demerger, etc
Target Structure Acquisition Structure Asset Purchase Parent Company Acquirer Parent Company Holding Company Holding Company Acquisition Co. Target Company Target Company Share Purchase • Acquirer sets up Acquisition Company in Target Country • Acquisition Company purchases Assets/Business of Target Company for cash consideration
How should you acquire it ?... • SPV Options • Company • Branch / Liaison office • Trust • LLPs • Applicable Tax Laws • Host Country • Target Country • SPV Jurisdiction • Tax Treaties
Need for an Overseas Holding Company (OHC) • Taxation of foreign dividends in India • Retention of profits in offshore jurisdiction • Deferment of tax • Greater flexibility for inter-company transfer of funds and for setting up operations in other overseas jurisdictions • Future restructuring easy • Better tax regime within European Union
Investors Considerations when choosing OHC • Receive dividends and capital gains tax free • - Corporate Tax (Participation) Exemption • Tax efficient repatriation of profits • - Reduced Witholding of Profits • Controlled Foreign Company (CFC) legislation • Finance companies mechanism • Flexible reorganizations • Reliable tax authorities - Rulings • Non tax driven considerations, e.g. IPO, exchange control regulations, protection IPR
How should you acquire it ? • Considerations • Capital Gains • Local taxes and underlying credit of foreign taxes • Withholding Taxes – Interest, Dividends and Royalties • Controlled Foreign Corporation Rules • Thin Capitalization Norms - Debt Vs Equity • Ability to push up / down debt cost • Valuation of intangibles • Accounting (Consolidation) • Stamp Duties
How will you minimize tax incidence on Profits ? • Direct Tax • Tax Incentives • Utilisation of B/f tax losses • Group Relief • Revenue • - Operating arrangements – Revenue vs Capital • Expenses • - Interest - Double dip • Treaty Shopping • Indirect taxes • Stamp Duty • Integration • Indirect Taxes • - Tax arbitrage from VAT via export and import • Transfer Pricing
Incomestream and their taxability Income streams Principles for evaluation Dividends • Interest, TS and royalty can flow independent of ownership pattern • TS and royalty would typically flow to an operating entity, which possess technical capabilities • Principal drivers are tax costs associated with dividend flows and gains on disposal of shares • Brand fee would flow to the IPR company Capital Gains Interest Other royalty / brand fees /technical Services / management services Keyelements – arm’s length principle, documentation, overall tax costs and foreign tax credits
How will you minimize tax incidence on Repatriation? • Dividend • Buy back / Reduction / Redemption of Preference Capital • Debt Repayment • Royalties, Fees for Technical Services, etc • Advances / Loans / Investments
How will you plan tax-efficient exit? • Use of Multi layered Structure • Capital Gains in Tax Free Jurisdiction • Sale of Foreign Assets • Merger / Winding Up • Taking advantage of Tax Incentives / Exemptions • LTCG – Listed Companies
Transfer of intermediary foreign company’s shares - Vodafone Case UK Co Mechanics UK • CCo1 sold its stake in CCo2 to Acquirer Acquirer NCo Issue Netherlands • Revenue Authorities contend that this transfer is taxable in India since the “controlling interest” in Indian Asset is transferred CCo1 Cayman Island CCo2 Through downstream subsidiaries Mauritius Co Mauritius I Co India
Debatable issues after Vodafone Case • What is the subject matter of transaction ? • Is transfer of interest in subsidiary merely a mode of transfer of interest in the downstream company ? • Does consideration paid or payable represents the value of assets of intermediary or of the downstream company ? • What is the effect of declarations made by the parties to the transaction to their respective shareholders and / or to their regulatory authorities ?