Transcript PowerPoint Timesaver Better charts, tables, and diagrams

Leveraging Tax Opportunities
with India:
What you need to know!
June 2010
Agenda
1
2
India Tax update
a
Salient features: India – Luxembourg treaty
b
Update on India’s treaty with Mauritius
c
Treaty benefits
d
Draft Direct Tax Code
e
FDI policy and recent amendments
2
Opportunities for investment funds
3
Cash Tax Savings ideas and opportunities generated by the
recent Double Tax Treaty
a
Opportunities for Indian inbound investments
b
Opportunities for Indian outbound investments
India - Luxembourg
© 2010 Deloitte S.A.
Part 1: Indian Tax Update
3
1
Salient features: India – Luxembourg treaty
2
Update on India’s treaty with Mauritius
3
Treaty benefits
4
Draft Direct Tax Code
5
FDI policy and recent amendments
India - Luxembourg
© 2010 Deloitte S.A.
Salient features:
India – Luxembourg treaty
© 2010 Deloitte S.A.
Treaty benefits under India - Luxembourg treaty
Effective Date
• The Double Taxation Avoidance Agreement (“DTAA”) between India and
Luxembourg is effective from 1 April 2010
Interest, Fees for Technical Services and Royalties
• The DTAA provides for taxation of interest, royalties and fees for technical
services, both in the country of residence as well as the country of source
• However, the rate of tax in the source country shall not exceed 10% of the gross
amount of payment in case the beneficial owner of the payments is a resident of
the other Contracting State
• Under the DTAA the scope of income taxable as fees for technical services is
very wide as it has been defined to mean consideration for managerial or
technical or consultancy services including provision of services of technical or
other personnel
Capital Gains
The DTAA provides that capital gains from alienation of shares of a company shall
be taxable in the country where the company(whose shares are sold) is a resident
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India - Luxembourg
© 2010 Deloitte S.A.
Treaty benefits under Indo - Luxembourg treaty
Business Profits
• The DTAA provides that business profits of an entity will be taxed in the country
of its residence unless such entity carries on its business in the other country
through a Permanent Establishment.
• PE includes service PE, warehouse PE, construction PE
Tax Credit
• In case of a Luxembourg resident, the credit method would be available only
where the income has been taxed in India as dividend, interest, royalty or fees
for technical services and of Artistes and Sportsperson. Such credit shall be
available to the extent of Luxembourg tax on such income.
• In all other cases double taxation shall be eliminated by the exemption method
whereby the income taxed in India shall be excluded from the taxable income in
Luxembourg. It is provided that such income can be included for rate purposes.
Limitation of benefit Clause
• ‘Limitation of Benefits’ under the DTAA is intended to prevent misuse of the
provisions of the DTAA. No specific limits has been prescribed.
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© 2010 Deloitte S.A.
Update on India’s treaty
with Mauritius
© 2010 Deloitte S.A.
India re-negotiating the Mauritius treaty
• India has been attempting to negotiate changes to the 28-year-old tax treaty, to
restrict its benefits to genuine residents of Mauritius
• Presently, there is no limitation of benefit clause in the Indo-Mauritius treaty
• India is keen on inserting a clause similar to the limitation of benefit clause in the
India-Singapore treaty, which provides for an expenditure test as a rule for
demonstrating commercial substance
• The cumulative foreign fund flow of $81 bn came into India between April 2000
and May 2009 from Mauritius
• Circular Nos. 682 dated 30-3-1994 and 789 dated 13-4-2000 issued by the
Central Board of Direct Tax, India have clarified that based on tax residency
certificate issued by the Mauritius tax authorities one could claim treaty benefits
• Further, the Supreme Court in India in the case of Azadi Bachao Andolan has
also affirmed the above and clarifies that in the absence of the limitation of
benefit clause, tax planning through the Mauritius route is permissible
• A recent ruling in the case of E*Trade Mauritius Limited by the Authority for
Advanced Rulings has also confirmed that the capital gains on sale of shares of
Mauritius company is not taxable in India
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India - Luxembourg
© 2010 Deloitte S.A.
E*Trade Mauritius Limited - AAR
Facts
• E*Trade is incorporated in Mauritius and holds a Tax
Residency Certificate issued by the Mauritius Tax
Authorities
• E*Trade sold shares held in IISL, an Indian company, to
HSBC Mauritius and realised long term capital gains on
the same
• E*Trade thereafter approached the Authority for
Advance Rulings to seek a ruling on the taxability of the
said transaction
• The AAR observed that :
− Outcome of Azadi Bachao Andolan case is that there
is no legal prohibition against “treaty shopping”
− If a resident of a third country, in order to take
advantage of a tax treaty sets up a conduit entity; the
legal transactions entered into by that conduit entity
cannot be declared invalid and therefore tax
avoidance is not objectionable if it is within the
framework of law and not prohibited by law
• AAR held that the fact that E*Trade USA provided the
funds and played a role in negotiating the transaction of
sale did not lead to the legal inference that the shares
were in reality owned by E*Trade USA
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India - Luxembourg
WOS
E*Trade
USA
Converging
USA
WOS
USA
Sale of
shares
HSBC
E*Trade
WOS
Mauritius
India
IISL
Not Liable for tax In India
© 2010 Deloitte S.A.
India looking from a different angle now
• Presently, the foreign investments into India through Mauritius stands at
• The tax authorities at lower levels are questioning the treaty benefits – are mostly
concerned about treaty shopping, the practice of routing third country investment
through tax havens to avoid paying taxes
• The urgency to amend the rules came after Vodafone’s acquisition of Hutch a
couple of years ago
• Income tax officials are being posted at Port Louis, Mauritius to facilitate greater
exchange of information between the two countries
• The Indian Government has also expressed its intentions to curb treaty shopping
in the recently proposed draft Direct Tax Code
“A team is going to Mauritius... we are on the job” finance minister
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India - Luxembourg
© 2010 Deloitte S.A.
Treaty benefits
© 2010 Deloitte S.A.
Relief under the tax treaties
Criteria
Singapore
Mauritius
Cyprus
Netherlands
Luxembourg
Appropriation
of profits -
Indian company
declaring dividends
is liable to pay DDT
of 16.61% is
payable in India;
DDT of 16.61% is
payable in India;
DDT of 16.61% is
payable in India;
DDT of 16.61% is
payable in India;
DDT of 16.61% is
payable in India;
Tax credit i.r.o DDT
may be available in
Mauritius
Tax credit i.r.o DDT
may not be
available in Cyprus
Tax credit i.r.o DDT
may not be
available in
Netherlands
Tax credit i.r.o DDT
may not be
available in
Luxembourg
Not subject to
capital gains tax in
India and
Singapore
Not subject to capital
gains tax in India and
Mauritius
Not subject to
capital gains tax in
India and Cyprus
Not subject to
capital gains tax in
India and
Netherlands if the
shares are sold to
non residents
Subject to capital
gains tax in India
Withholding is
required to be @
10%
Withholding is required
to be @ 15%
Withholding is
required to be @
15%
Withholding is
required to be @
20%
Withholding is
required to be @
10%
(rate under Indian
Domestic tax law is
lower)
(rate under Indian
Domestic tax law is
lower)
(rate under Indian
Domestic tax law is
lower)
Withholding is
required to be @
10%
Withholding is
required to be @
20%
Withholding is
required to be @
10%
Taxability of
dividends
Tax credit i.r.o DDT
may not be
available in
Singapore
Capital Gains
of sale of
Indian
company
shares
Royalties
Fees for
technical
services
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India - Luxembourg
Withholding is
required to be @
10%
(rate under Indian
Domestic tax law is
lower)
No withholding is
required
© 2010 Deloitte S.A.
Relief under the tax treaties
Criteria
Singapore
Mauritius
Cyprus
Netherlands
Luxembourg
Tax Credit
Provisions in
tax Treaty
Tax Sparing and
Underlying tax
credit available
Tax Sparing and
Underlying tax credit
available
Tax Sparing credit
available
Tax Sparing and
Underlying tax
credit available
Exemption method
Limitation of
benefits
Clause
Exists
No limitation
on benefits
No limitation
on benefits
Exists
Exists
Nature of the
Limitation of
Benefits
Clause
To qualify for
benefits, total
annual expenditure
on Singapore
operations should
be at least
$200,000 in the
immediately
preceding 24
months from the
date of gain
NA
NA
To qualify for
benefits, it is to be
proved that the
main purpose or
one of the main
purposes of creation
of the enterprise is
not to obtain
benefits under the
DTAA which would
otherwise not be
available
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Tax Residency
Certificate is required
and a judgment of the
Supreme Court also is
in the form of an
insulation
NA
© 2010 Deloitte S.A.
Draft Direct Tax Code
© 2010 Deloitte S.A.
Finance bill 2010-11
• The Finance Minister while presenting the
Finance Bill 2010-11, has commented
about the reforms in the form of Direct Tax
Code (DTC)
• The Finance Minister has indicated that the
DTC is likely to be implemented with effect
from 1st April 2011
• Certain important provisions proposed in
the DTC relevant to international taxation
have been discussed in the ensuing slides
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© 2010 Deloitte S.A.
Relief under the tax treaties
Concept of “domestic tax law or treaty, whichever is more beneficial” done away
with. After the introduction of the code, the domestic tax law or treaty, whichever is
later in time, shall prevail.
Treaty benefits claimed hitherto, will not be available post introduction of the
DTC – E.g.
• Exemption from Capital Gains, Interest etc
• Benefit of restricted scope of definition of royalty and FTS
• Narrow scope for business presence - permanent establishment
• Lower rates for Royalty and FTS
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India - Luxembourg
© 2010 Deloitte S.A.
Relief under the tax treaties
Issues
Existing provisions
Direct Tax Code
Remarks
1. Exit for investors:
a. Beneficial treatment
available for Capital
Gains under certain
treaties like Mauritius,
Cyprus, Singapore,
Netherlands etc.
Assessee eligible to claim
the benefit of the treaty if
the same is more
beneficial as compared to
the domestic tax law
Provisions of the Code, or the
treaty whichever is later in time
shall prevail.
Investors were able to claim
treaty benefits at the time of exit
in respect of investments
structured through treaty
favoured jurisdictions. However,
post introduction of the DTC, the
such exits will be governed by
the DTC, as the same would be
later in time.
b. Business Income
Business Income of non
residents taxable in India
only if the nonresident
has a permanent
establishment in India in
terms of the treaty
provisions
Definition of business
connection under the proposed
Code is wider than the
definition of permanent
establishment under the treaty.
Provisions of the Code, or the
treaty whichever is later in time
shall prevail.
Taxation of non-residents,
hitherto covered by treaty law
will now be governed by DTC,
as the same would be later in
time.
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© 2010 Deloitte S.A.
Definition of “Resident” changed
Residence concept for companies changed:
Definition of
resident as
per DTC
•
•
•
Indian company to be treated as resident in India
Foreign company and every other person to be treated as resident in
India, if the control and management of its affairs are situated wholly or
partly in India at any time in the financial year
Global income of a resident shall be taxable in India
Impact
• The proposal may impact the Indian MNCs who have subsidiaries abroad or
Global organisations having corporate head quarters in India or MNCs having
regional hub in India
• Global income of such companies likely to be brought within the tax net
• Even a single director (participating in decision making) resident in India could
result in part management of the foreign company to be construed in India
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© 2010 Deloitte S.A.
Direct and indirect transfer of Indian assets
Proposed provision
Indian Assets
• Any transfer of Indian assets, whether directly or indirectly, shall be taxable in
India
Impact
• Global reorganisation leading to transfer of ownership of Indian assets even
indirectly is brought into the tax net
• Post 1 April 2011, irrespective of the jurisdiction of the holding company, any
buyback would result in capital gains taxable in India
• Capital gains are taxable @ 30% in case of non-residents
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© 2010 Deloitte S.A.
General Anti-Avoidance Rule (GAAR)
Introduction of Anti-Avoidance Rules
• GAAR introduced to curtail tax avoidance and to be invoked on satisfaction of
prescribed conditions
• Commissioner of Income-tax (CIT) empowered to declare a transaction as
impermissible if the same has been entered into
− with the objective of obtaining tax benefit; or
− without any commercial substance; or
− creates any rights or obligations not normally created in the arm’s length
transactions; or
− results into direct or indirect misuse of the provisions of the Code
• GAAR empowers CIT to alter, nullify or re-characterise the transaction
• GAAR to override the tax treaty
• GAAR to be further supported by specific anti-abuse rules in circumstances such
as
− payment to associated persons in respect of expenditure,
− international transaction not at arm’s length,
− transactions resulting in transfer of income to non-residents and avoidance of
tax in certain transactions in securities
• Provisions aimed to prevent misuse of tax status of investor or financier
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India - Luxembourg
© 2010 Deloitte S.A.
General Anti-Avoidance Rule (GAAR)
Commercial substance
• Lacking commercial substance defined to
include situations where there is a
− significant tax benefits without a significant effect upon
business risk or net cash flows
− legal substance or effect differs from legal form
− it involves or includes
• round trip financing
• an accommodating or tax indifferent party
• any element that has the effect of offsetting or cancelling each
other
− a transaction which is conducted through one or more
persons and disguises the nature, location, source,
ownership or control of funds
• Onus on the tax payer to prove that the
transaction is not an impermissible
transaction
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© 2010 Deloitte S.A.
FDI policy and recent
amendments
© 2010 Deloitte S.A.
Foreign Direct Investment (FDI) regulatory framework
• Certain specific sectors have now been explicitly indentified e.g.
− Headend-In-The-Sky (HITS) Broadcasting Service, business services, health
and medical services, securities agencies in private sector, etc.
• For the first time the term wholesale cash and carry trading has been explained.
It is also now provided that
− Wholesale trading among group companies would be permitted only up to 25%
of the total turnover of the wholesale venture and
− The wholesale made to the group companies should be for their internal use
only.
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© 2010 Deloitte S.A.
Liberalisation of limits on royalty remittances
• FEMA regulations had certain restrictions as given below on remittance of
royalty payments to non residents
− If the technology transfer fee exceeds USD 2 million, it has to be approved by
the RBI
− For royalty, the limit is 5% of domestic sales and 8% of exports
− If there is no transfer of technology, royalty (for brand name) limit is 1% of
domestic sales and 2% of exports
• It is now proposed to allow all payments for royalty, know-how fee for transfer of
technology, payments for use of trademark or brand name through the
“automatic route” without any restrictions
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India - Luxembourg
© 2010 Deloitte S.A.
Part 2: Opportunities for Investment funds
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© 2010 Deloitte S.A.
Opportunities for
investment funds
© 2010 Deloitte S.A.
How UCITS currently invest in India
Model of UCITS investing in Indian
assets
Fully owned
subsidiary
Fund
Corporate
governance
requirements
Mauritius
subsidiary
Regulatory
requirements
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India - Luxembourg
Indian
assets
© 2010 Deloitte S.A.
… not an ideal situation
+
Pros
Cons
• Tax efficient structure
• No easy to implement
• Access to the Indian market
• Cumbersome from administrative
and organisation point of view
• Luxembourg has build a specific
knowledge in setting up such
structure
• High set-up and running costs
• Quite unique in the UCITS universe
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India - Luxembourg
• Can cause uncertainties in the crossborder distribution
© 2010 Deloitte S.A.
Many opportunities arising from a new potential tax regime
Potential advantages of the new Luxembourg
regime
New opportunities exist to set-up
UCITS investment vehicle in
Luxembourg
- to gain exposure to the Indian Market
from an Asset Management
perspective
- for fund promoter to propose
investment products investing in India
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India - Luxembourg
•
Vehicle Remain tax efficient
•
Direct investment will result in a less costly
structure
•
Easy to implement from an administration
perspective
•
Reduced uncertainties from a cross-border
perspective.
•
Custody knowledge in Luxembourg to deal
with foreign markets
© 2010 Deloitte S.A.
Part 2: Cash Tax Savings ideas and opportunities
generated by the recent Double Tax Treaty
1
a
b
c
2
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India - Luxembourg
Opportunities for Indian inbound investments
Overview
Ideas for financing structures
Ideas for Intellectual Property structures
Opportunities for Indian outbound investments
© 2010 Deloitte S.A.
Opportunities for Indian
inbound investments
© 2010 Deloitte S.A.
A - Opportunities for Indian inbound investments
Overview
Overview
ParentCo
• A group is operating
investments in India
and
has
LuxCo
• The investment in India may be done
though Luxembourg via
Indian
subsidiary or Indian branch office
NewLuxCo
IndianCo
Indian branch
Advantage:
• No WHT on remittance of
profits to Lux head-office
Disadvantage:
• Limited scope of activities
permitted
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India - Luxembourg
• Funding of the Indian operations can
be done with Foreign Direct
Investment
and/or
External
Commercial Borrowing
Advantage:
• A larger scope of activities is
permitted
Disadvantage:
• Dividend distribution subject to
16,61% taxation
© 2010 Deloitte S.A.
Investing in India – FDI ECB overview
Foreign Direct Investment (FDI)
Applicable to:
•
•
•
•
Equity
Convertible debentures
GDR (Global Depository Receipts)
American Depository receipts (ARD)
•
•
Prohibited for following activities:
•
•
•
•
Limits as regards the eligible lenders and borrowers
Limits as regards the amounts at stake and maturity
Limits as regards the permitted end-use of the loans
See slides for more information
•
The WHT on interest is reduced to 10% du to the DTT
between Lux and India
The interest is fully deductible
-
Main
characteristics
•
-
-
Disadvantages
Gambling/betting
Lottery business
Atomic energy
Etc (see slides)
Loans:
-
Corporate loans/borrowings
Partially/optionally/non convertible debentures
Partially/optionally/non convertible preference shares
Most of the areas of activity are placed under automatic route:
-
Advantages
External commercial borrowing (ECB)
100% FDI for sectors such as investment in power, construction,
development projects, non banking finance companies,
manufacturing, venture capital funds
Where 100% FDI is not allowed, the Government permits FDI up to a
certain percentage (sectoral cap)
100% FDI is permitted from Special Economic Zone and Export
Oriented unit
100% is permitted for setting up of Industrial Parks/Industrial Model
Towns
•
•
Less restrictions contained in the FDI guidelines
Scope of permitted activities is larger under FDI
•
As treated as equity  repatriation of dividends is subject to 17%
of WHT in India
•
•
More restrictions as regards the activities
/amounts/rates for the financing under ECB
CONVERTIBLE DEBENTURES combine the advantages of both FDI and ECB
• Treated as equity for FDI purposes
• Debt for tax purposes in India  deductibility of the interest payment + reduced WHT
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© 2010 Deloitte S.A.
B - Opportunities for Indian inbound investments
Ideas for financing structures
Benefits
ParentCo
From Indian perspective:
• The interest paid on the loan is fully deductible at India Co
level
• WHT tax of 10% on interest paid is due to the Lux-India
Double Tax Treaty (instead of 20% plus surcharge and
fees)
• ECB guidelines to be complied with
Mauritius /
Singapore/ Cyprus
Co
IndianCo
LuxCo
From Luxembourg perspective:
Finance branch
• The interest income received by the Finance branch will be
fully exempt in Luxembourg as the finance branch qualifies
as a permanent establishment under DTT provisions (can
be Switzerland /US/ Ireland/ Hong Kong)
Loan
Interest
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India - Luxembourg
© 2010 Deloitte S.A.
C - Opportunities for Indian inbound investments
Ideas for IP structures
Benefits
From India perspective:
ParentCo
• The royalties paid on IP licenses are fully deductible at the level
of the Indian Branch/IndianCo
• WHT tax of 10% on royalties paid due to the Lux-India Double
Tax Treaty (instead of 20% plus surcharge and fees)
Mauritius /
Singapore/ Cyprus
Co
From Luxembourg perspective:
IndianCo
LuxCo
• The IP licensing activity can benefit from the IP box regime
available in Luxembourg (exemption of 80%)
• Other alternative IP tax plannings may be implemented at the
level of IPCo
Royalties
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© 2010 Deloitte S.A.
B - Opportunities for Indian inbound investments
Ideas for financing structures
Purpose
• Offset the Luxembourg Corporate Income Tax using the Indian
withholding tax paid
Luxembourg
IPCo
IP
Royalties
(90)
Royalties
(90)
NewLuxCo
10% Indian WHT
on roaylties
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India - Luxembourg
IndianCo
Indian
branch
Benefits
• Royalties deduction in India  Reduction of IndianCo’s taxable
basis
• Low global royalties taxation
Luxembourg Foreign Tax Credit System
• Royalties received in Luxembourg from India: 90
• Luxembourg operating expenses: 10
• Net royalties income: 90 – 10 = 80
• Application of the IP Box regime  80% royalties exemption
• Taxable Indian royalties in Luxembourg: 16
• Tax due in Luxembourg (prior to the use of tax credits):
− Corporate Income Tax (21,84%): 3,49
− Municipal Business Tax (6,75% in Lux city): 1,08
© 2010 Deloitte S.A.
B - Opportunities for Indian inbound investments
Ideas for financing structures
Luxembourg
IPCo
IP
Royalties
(90)
Royalties
(90)
NewLuxCo
10% Indian WHT
on roaylties
IndianCo
Indian
branch
Luxembourg Foreign Tax Credit System (ct’d)
• Withholding tax paid in India: 10
 Indian WHT is creditable against Luxembourg CIT using the
following formula:
− Gross profit arising from India: 100
− Net profit arising from India: 100 – 10 = 90
− Maximum theoretical amount of WHT creditable against
Lux CIT:
(90 * 0,2184) / (1 – 0,2184) = 25,19
 All of Indian WHT (10) is creditable against
Luxembourg CIT
Final Tax Liability
• In Luxembourg (after use of tax credit)
− Corporate Income Tax: 3,49 – 10 = 0
Indian WHT can only be used up to the Lux CIT tax liability
− Municipal Business Tax (6,75% in Lux city): 1,08
Indian WHT cannot be credited against Lux MBT
• In India
− 10 % Withholding Tax: 10
Global ETR: (1,08 + 10) / 100 = 11,08%
(Mainly composed of Indian WHT, not subject to
reduction)
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© 2010 Deloitte S.A.
Opportunities for Indian
outbound investments
© 2010 Deloitte S.A.
Opportunities for Indian outbound investments
Benefits
•
•
Deductions in source countries
Income pick up reduced in Luxembourg based on
exemptions and plannings
• Repatriation is also possible in the following ways:
− Royalty payments
− Fees for technical services
− Interest payments (lending by IndianCo to
LuxHoldCo)
Indian Co
Low ETR in Luxembourg:
•
•
Dividend, capital gains,
liquidation proceeds
exempt if conditions
met
LuxHoldCo
Considerations
Planning for financing,
IP, entrepreneur
activities
No or reduced
WHT based on
EU Directives
or DTTs
Subs
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•
•
Repatriation of profits and/or reengineering
India Luxembourg tax treaty has a “Limitation of
Benefits” clause which need to be complied
© 2010 Deloitte S.A.
Appendices
© 2010 Deloitte S.A.