Outbound-Investment_Tax-Strategy-Planning-CA.Jatin-Kanabar

Report
Outbound Investments –
Tax and regulatory perspectives
Jatin Kanabar
October 6, 2013
Contents
• Overview and key aspects
• Relevant FEMA regulations
• Relevant tax considerations
• Structuring outbound investments
• Profit alignment
• Group financing company
• IPR holding company
• Concluding remarks
2
Overview and key aspects
3
Commercial reasons for outbound presence
4
•
Access to newer market / product /
technology/IP
•
Expanding distribution network
•
Raw material sourcing (Africa, SE Asia etc)
•
Global scale of operation – Global footprint and
market share
•
Managing / spreading risk, fund raising –
Overseas listing (NYSE, LSE, Luxembourg, etc)
•
Proximity to global customer
Primary
reasons
Outbound deal summary - 2012
25000
22498
20000
13777
15000
Volume
10313
10000
Value (USD
mn)
5000
190
137
125
0
2010
3%
Oil & Gas
7%
4%
Pharma, Healthcare & Bio tech
Manufacturing
4%
Plastic & Chemicals
4%
44%
7%
IT & ITeS
Hospitality
Infrastrcurure Management
8%
FMCG, Food & Beverages
Textile & Apparel
9%
10%
5
2011
Others
Source: Grand Thorton Deal Tracker Report, Annual Addition, 2012
2012
Business considerations for outbound
Significant business considerations
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
•
6
Long term business outlook
Administration and Compliance Cost
Access to international capital markets
Ease of transfer of funds
Perception in international markets
Exchange control regulations
Foreign Regulatory aspects
Political stability
Commercial dispute resolution mechanism
Membership of Free Trade Agreements
Labour / immigration laws – ease of movement of people
Cost of inputs – employee cost and operating cost
Incentives made available under the local laws
Availability of educated resources
Technology preparedness
Country blacklisted or not
Liability protection
Key elements of outbound structuring
TREASURY
MANAGEMENT
Manage Foreign
Exchange
Tax Efficient
Lending
Transfer Pricing
Planning
PROFIT
ALIGNMENT
IP & Royalty Planning
7
Cash Management &
Redeployment
CFC/ Participation
Exemption Planning
Holding
Companies
In-country
Planning
OUTBOUND
Business & Manage
Supply
Deferral
Chain
Positions
Planning
ATTRIBUTE
MANAGEMENT
Foreign Tax Credit &
Loss Utilisation
Relevant FEMA regulations
8
Relevant FEMA regulations (1/4)
Parameters
Regulations in brief
• Total financial commitment not to exceed 100% of the net worth as on date of last
Financial
Commitment
Limitations
audited Balance Sheet and beyond 100% cap shall require prior approval
• Limit of 400% will be retained for financial commitment funded by ECB
• Investment can be made by way of equity or equity and debt/guarantee
• Only debt not permitted
• All Indian entities are prohibited from investing in real estate and banking business
under automatic route
• Must be engaged in bonafide business activity
• Investor should not be on RBI’s caution list / list of defaulters
• Should not be under investigation by investigation / enforcement agency
• Investment in un-incorporated entities – not permitted (except Oil & Gas sector)
• Indian companies are also permitted to participate in a consortium with
international operators to construct and maintain submarine cable systems
• Investment in shares of existing company – mandatory valuation requirements
where the investment is more than USD 5 million
• Investment by way of swap of shares
Other aspects
• Mandatory valuation of shares by Merchant Banker / overseas regulated
Investment Banker irrespective of amount of investment
• Prior approval of FIPB required
9
Relevant FEMA regulations (2/4)
Parameters
Regulations in brief
• Prior equity participation necessary to extend loan / guarantee
• Guarantee can be in any form viz corporate, personal, primary or collateral,
Guarantee
Provisions
•
•
•
•
Multilayer SPV’s
10
guarantee by promoter company / group company / sister concern / associate
company in India
Guarantee to be included while calculating the limit of 400%
No guarantee to be open ended
Guarantees issued by banks in India on behalf of JV/WOS would be subject to
prudential norms issued by RBI from time to time
Guarantees given to step-down subsidiaries will be considered under the Approval
Route, provided the Indian Party indirectly holds 51 per cent or more stake in the
overseas subsidiary
• 2013 Master circular on Outbound Investments
• Investments in JV/WOS abroad by Indian party through the medium of a
Special Purpose Vehicle (SPV) are also permitted under the Automatic
Route,….. setting up of an SPV overseas under the Automatic Route is
permitted only for the purpose of investment in JV/WOS overseas
• No restrictions on entities having JVs/WOSs abroad setting up second generation
companies (step-down subsidiaries) within the overall limits applicable for
investments under the Automatic Route.
• However, companies wishing to set up step-down subsidiaries to undertake
financial sector activities will have to comply with the additional requirements
for direct investment in the financial services sector
Relevant FEMA regulations (3/4)
Parameters
Valuation in partial
/ full acquisition
Consideration
other than cash
Divestment under
Automatic Route
11
Regulations in brief
• Partial / Full acquisition of foreign company – Valuation norms to be followed:
• Investment more than USD 5 Million :- Category I Merchant Banker registered
with SEBI / Approved Investment Banker / Merchant banker in host country;
• Other cases: Chartered accountant or a Certified Public Accountant
• Investment by way of swap of shares would require approval from the Foreign
Investment Promotion Board
• Valuation mandatory by a Category I Merchant Banker registered with SEBI or
an Investment Banker registered in the host country
• ADR/GDR exchanged for shares of foreign company – the holding of non-resident in
the Indian company represented by underlying shares cannot exceed the permissible
sectoral cap
Transfer by way of sale of shares of JV/WOS
• No write-offs
• Sale is effected through a stock exchange where the shares of JV / WOS are listed
• In case shares are not listed and they are disinvested by a private arrangement, the
share price should not be less than the fair value certified by a Chartered Accountant
/ Certified Public Accountant based on the latest audited financial statements of the
JV / WOS;
• No outstanding dues from JV/WOS
• JV / WOS is for operation for atleast one year and APR has been filed
• Indian Promoter Company is not under investigation from regulatory authorities
(Contd..)
Relevant FEMA regulations (4/4)
Parameters
Divestment under
Automatic Route
12
Regulations in brief
Transfer by way of sale of shares of JV/WOS involving write-offs, following additional
conditions to be satisfied• in case where the JV / WOS is listed in the overseas stock exchange;
• Indian Company listed on stock exchanges with net-worth of Rs 100 crs.
• Indian unlisted Company with a overseas investment of less than USD 10mn
• Indian listed company with net worth of less than Rs.100 crore but investment in an
overseas JV/WOS does not exceed USD 10 million.
Relevant tax considerations
13
Outbound investment – key tax considerations
Investment
structure
Holding structure
14
• Subsidiary v Branch
• Local tax structure, incentives, etc.
• Withholding tax
• Treaty Network
• Treaty protection, LOB clause
• CFC regulations
• Holding country environment
• Substance requirement
Mode of funding
• Sources of funding- own funds v borrowed funds
• Funding instruments – debt v equity
• Thin Capitalisation rules
• Foreign exchange Control
Repatriation/ Exit
• Dividend / Interest / Royalty
• Service fee
• Capital gains
• Foreign tax credit
Relevant domestic tax provisions
Taxation of foreign sourced
income
Income
Tax rate*
Dividends from Foreign
entities**
16.99%# /
33.99%
Capital gains on sale of
shares of foreign entities
21.66% /
33.99%
Any other income
33.99%
No provisions for allowing underlying tax
credit (except in few tax treaties)
*
Anti-abuse provisions
CFC & PoEM rules proposed in DTC
Transfer pricing regulations
GAAR Provisions – Proposed to be
made effective from FY 2015-16
Deemed dividend provisions
Tax rate plus surcharge @ 10% plus cess @ 3% (On the presumption that taxable income
exceeds Rs.10 Crores)
** Dividends received from a foreign subsidiary to be reduced in computing dividend distribution tax
payable by the Indian holding company
# Foreign dividends to be taxed on gross basis without deduction of any expenses. Lower tax rate
to apply for FY 2013-14 in case dividend is received from foreign company in which such Indian
company holds atleast 26% of nominal-value of equity share capital.
15
Structuring outbound
investments
16
Mode of outbound investments
Outbound investments
Branch route
• No deferment of Profit/loss of the foreign
entity
• Possible view that branch profits
not taxable under certain treaties
• Implication under Transfer Pricing critical
– profit attribution
• Ideal where the overseas business will be
incurring losses for a longer period of
time
• Ordinarily no tax on distribution of profit –
lower tax outflow- Branch tax may apply
17
Entity route
• Deferment of profit/loss – consolidation
for tax purpose not recognized
• Proposed CFC regulations
• Profit attribution may not be a
significant issue
• Accumulation of profit possible for
future investment
• Higher tax outflow on account of
subsequent remittance of profit to the
Indian Company
Direct investment v Investment through IHC (1/2)
• Direct investment may not be very tax efficient
Indian
Company

Income received by the Indian Company would be subjected
to corporate tax @ 16.99/ 33.99%

No ability to time dividend/ interest and capital gains to be
received in India
India
Direct
Investment
Target
Country

Cash flow issues:
o
Dividend/ interests may be subject to high withholding tax
in the source country
o
Sub Co
Capital gains on sale of shares of subsidiary may be
subject to high tax in country where the subsidiary is
located
18
Direct investment v Investment through IHC (2/2)
•

Indian
Company
Dividend, interest and capital gains income may be received with low/ nil
withholding tax and accumulated in low tax jurisdiction
India
Investment
Investment though IHC is beneficial
Jurisdiction
of IHC

Ability to time receipt of dividend, interest and capital gains in India

Overall group level taxation could be minimised by consolidating group
losses

IHC
Debt borrowings at the Holding Company level could enable interest cost
deduction from an overall tax perspective

Consolidate group strength in the IHC and tap external sources of finance
(leveraging on group strength)
Investment
Target
Country

Holding IPR’s for group and carrying out other functions such as
marketing and distribution
Sub Co
19

Accumulate and use the existing group funds with greater flexibility

Act as a borrowing and lending intermediary for the group

Manage adverse currency fluctuations and exchange controls

Centralise control over funds through treasury management
Key Considerations for identifying IHC jurisdictions
• On receipt of dividends,
interest and capital gains
• On income streams
• On subsequent redistribution
of passive income
• Continuity of past losses of
Target Companies
• Deductibility of borrowing
costs paid
• Mitigate taxation of profits of
operating cos. in the hands of
an IHC
20
Lower
corporate tax
and
withholding
tax rate
Effective
treaty
network
Thin
Capitalization
norms &
Existence of
CFC
Regulations
Other factors
• Minimize double taxation
• Obtain withholding and
underlying tax credits
• Enhance tax efficiency of
international transactions
entered into with other
group entities
•
•
•
•
•
Political & economical scenario
Investment climate
Exchange control regulations
Financial and banking facilities
Access to international capital
markets
• Ease of transfer of funds
Setting up IHC - Illustrative jurisdiction summary (1/2)
Parameters
Singapore
Mauritius
United
Kingdom
Netherlands
Cyprus
Luxembourg
ESTABLISHING HOLDING COMPANY – BUSINESS CONSIDERATIONS
CFC regulations
Not
applicable
Not
applicable
Applicable
Not
applicable
Not applicable
Not applicable
Number of
jurisdictions with
active income tax
treaties (Minimum)
69
36
119
90
45
64
Effective corporate
tax rate
17%
Maximum
3%/15%
24%
25%
10%
22.47%
(including
unemployment
fund surcharge
& municipal
business tax)
TAX TREATMENT OF PAYMENTS BY HOLDING COMPANY
Withholding tax rate
on dividends paid to
non-resident
0%
0%
0% (Governed
by EU
directives)
0%/15%/
0%-15%
(Governed by
EU directives)
0% (Governed
by EU
directives)
0% (Governed
by EU
directives)
Withholding tax rate
on interest paid to
non-resident
15%/ 015%
0%
0%/ 20%/
0-20%
0%
0%
0%
Thin capitalization
rules
Not
applicable
Not
applicable
Applicable
Applicable
Not applicable
Applicable
21
Setting up IHC - Illustrative jurisdiction summary (2/2)
Parameter
Singapore
Mauritius
United
Kingdom
Netherlands
Cyprus
Luxembourg
TAXATION OF HOLDING COMPANY
Taxability of dividend
received
Exempt/
Taxable
with credit
for foreign
withholding
tax and
underlying
tax (first tier
subsidiaries
only)
Taxable on
gross
dividend
basis with
credit for
withholding
and UTC
Exempt
(Participation
exemption)
Exempt
(Participation
exemption)
Exempt
Exempt
(Participation
exemption)
Taxability of gains on
sale of shares held in
subsidiary
companies
Exempt
Exempt
Exempt
(Participation
exemption)
Exempt
(Participation
exemption)
Exempt
Exempt
(Participation
exemption)
Joint taxation for
group companies
Not
available
Not
available
Not available
Available
Not available
Available
22
Profit alignment
23
Business Model Optimisation
Opportunistic reduction of Global Effective Tax Rate
Income in low
tax
jurisdictionConcentrating
profits for the
Entrepreneur
company in
low tax
jurisdiction
Expenses in
high tax
jurisdictionEg,leveraging
by use of debt
and equityleveraging
Riding the tax
arbitrageWithholding
tax v
Corporate tax
Intangible
Planning
Own
intangibles in
low tax
jurisdiction
allows
efficient
licensing
Defer
income
recognition
and
accelerate
expense
deductionUse of IHC
Tax considerations cannot dictate business but tax efficiency can provide
significant competitive edge.
24
Group financing company
25
Group financing company
Key Considerations
Indian
Company
India
Outside India
IHC
Fin Co.
Equity
Debt
•
Domestic regime for Finance Co.
•
Withholding tax
•
Consideration of CFC rules
Benefits
• Debt pushdown
• Tax arbitrage- deduction of borrowing
costs on
Dividend
Op.Co.1
Country A
Op.Co.1
Country B
Interest
• Minimum tax cost of profit repatriation
to ultimate parent company
26
IPR holding company
27
Objectives of IPR restructuring
• Preserve legal rights and protect tax incentives granted to R&D activities
• Consideration to CFC rules, exit strategy etc.
• Reduce exit costs in migrating economical rights in IPR
• Reduce taxation of royalty income
• To enhance deductibility of royalty payments
28
IPR holding company - Illustration
Key considerations
Indian
Company
Equity
Investment

Capital gain tax on relocation of IPRs

IP protection Acts

Patent works regime

Transfer pricing aspects
India
Outside India
Potential tax benefits

IPR holding
Co
Reduction of the effective tax rate (ETR) incurred on royalty
income and capital gains resulting from the sale/disposal of the
IPR
License
Fees

Minimization of the withholding tax on the royalty flows paid by the
various subsidiaries of the group or external parties.

Full deduction of royalty payments at the level of all operational
entities that use any of the group’s intangible assets.
Op. Co.1 Op.Co.2
Op.Co.3
Popular jurisdictions for setting up IPR holding company
29

Switzerland

Luxembourg

Ireland
Illustrative IPR holding regimes
Parameters
Switzerland
Luxembourg
Ireland
Tax benefit
No special IP regime but
ordinary regime produces low
effective rates with planning
Exemption – 80% of net income
Patent regime – upto € 5
exempt income
IP regime- allowances upto
80% of net profit
ETR
7.8% to 11%
Up to 5.8%
Up to 12.5%
Under Nidwalden royalty box
model, ETR is reduced to 1%3%
Qualifying assets
Any IP which can be licensed
Patents, trade marks, designs,
models, software copyrights,
domain names
Patents (filed), brands, trade
names, copyrights and
associated rights
Can acquire IP benefit
regime
Yes
Yes but not fromDirect parent (10%+ holding) or
asset subsidiary (10%+ holding)
or sister company (10% common
parent).
Yes
Patent should be acquired/
credited post 31 December 2007
Other
30
Will require substance in a
branch where tax rates are low;
Swiss anti-abuse rules to be
considered
Advance ruling procedure
provides certainty
IP regime requires an active
trade
Concluding remarks
31
Conclusions
•
Selection of Hold Co jurisdiction depends upon the key objectives / needs of an investor
•
Tax and commercial considerations often dictate a selection Hold Co jurisdiction
•
Tax is an important consideration for selecting the Hold Co. jurisdiction but it cannot be the
only consideration
•
Proper tax planning in any outbound investment proposal is imperative to optimize post tax
profits in the hands of the Indian investor
•
The tax planning exercise would require a detailed study of the relevant tax provisions and
other regulations of the host country together with the business objectives and the given
parameters of the business model
•
Once the structure is in place one has to consider the possibility of profit alignment by
suitable allocation of functions and risks
32
Open house …
33

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