Topic : Tax Structuring – Domestic and
International – Recent Developments
Speaker : Dinesh Kanabar, Chartered Accountant
Date : 18th February 2015
Venue : Walchand Hirachand Hall, Indian Merchants Chamber
The
speaker covered the current global scenario and Indian scenario, from
the tax structuring perspective. He mentioned that the revenue from oil
resources are dropping and hence taxes are being looked upon as a means
of revenue for the Government in the global context. Tax Litigation
being very expensive and laden with uncertainty in India, one cannot
disregard the importance of structuring. In this context, he explained
the Vodafone case as well as a decision of the Delhi High Court in Shiv
Kumar Gupta. He explained to the audience that, while tax evasion was
illegal, tax planning was permissible, while the permissibility of
structuring would depend on whether there was any commercial substance
to such structuring.
The speaker pointed out that the debate on
Tax morality continues. In the global context, he mentioned about how
the CEO of Apple was summoned to explain how Apple could keep away
millions of dollars in Ireland and not pay taxes in the US. He briefed
the members that fundamentally tax planning in the US was by deferring
the taxes. Obama, President of the USA, has proposed a bill in the
Senate that all monies kept outside of USA will be brought to USA and
taxed in USA @ 14% (ONE TIME) as against 35%. The US President has also
proposed that since income arises year on year, he will try to reduce
taxes from 35% to 28%. In future, global income of the US companies will
be taxed in the USA @ 19% year on year. In a lighter vein, he pointed
out that tax planning in the USA would come to a standstill, if the bill
became law. He touched upon the case of Starbucks in UK and the Google
tax.
The speaker felt that LLP as a structure was needed to be
given more attention purely from a tax perspective, an LLP had more
advantages compared to a private company. Given that the tax rate is the
same, there is no MAT , DDT or buy back tax for LLPs. From the FDI
perspective, the only disadvantage is that cash infusion is the only
option available to make investments and there is no room for swap or
in-kind infusion.
The speaker also analysed tax provisions with
reference to conversion of existing company to LLP and the consequences
of the conversion – stringent conditions for tax neutralitiy – Rs.60
lakh turnover criteria. He felt that it could be urged that the
conversion was not taxable based on first principles (Azadi Bachao
Andolan), but this could be highly litigative. He also discussed the
impact of structuring with respect to direct and indirect holding
companies.
The speaker discussed the concept of FDI using
holding company, risk of double taxation due to source rule. He
explained that there is increased scrutiny of claims for treaty benefits
in India and hence, one has to be careful in structuring. The claim
should be backed by Substance in the tax jurisdiction of the holding
company, commercial rationale for use of Holding Company, Availability
of tax residency certificates, and Compliance with limitation of
benefits clause, if any. The additional considerations arising due to
the amendment to 9(1) (i) in regard to for use of multi-tier structures
were also discussed..
Since there are significant costs
associated like Dividend Distribution tax, Buy back tax, withholding tax
on interest payments, royalty and fees for technical services etc,
careful planning is required for cash extraction. The speaker also
touched upon conflicting decisions of AAR in respect of the above as
such as Timken Co In Re (326 ITR 193) and Castleton In re (348 ITR 537)
where Special Leave Petition is pending before the Supreme Court. Some
of the other considerations to be looked into while planning the
structure were:
a. Foreign Tax Credit availability in home jurisdiction on income-streams from India to be evaluated
b. Creditability of DDT & Buyback tax could be contentious as:
a. DDT /Buyback tax is levied on the company and not on the shareholder
b. DDT /Buyback tax is not paid on behalf of shareholders
c. U nderlying tax credits may not be always available
c.
N on-availability of credits would affect the tax costs significantly
and applicability of MAT to Capital gains is a litigative issue.
The
speaker discussed in depth about the issues that should be considered
for outbound structuring such as use of SPVs (Special Purpose Vehicles),
IPR regime and thin capitalisation rules. Moving on to BEPS, the
speaker gave an overview of the OECD action plan and focus on key items
such as Transfer pricing, CFC rules, Hybrids, treaty abuse, digital
economy. Some key aspects which will define BEPS is the ‘substantial
activity’ factor, whether a regime “encourages purely tax-driven
operations or arrangements” and are tax payers deriving benefits from
the regime, while engaging in operations that are purely tax-driven and
involve no substantial activities.
The key takeaway from the
lecture was that BEPS is a game changer and there is an urgent need to
focus more on domestic anti-abuse tax legislations in various
jurisdictions.
