evolving and dynamic - tax and regulatory ...fdi •fdi in llps allowed with approval from fipb in...

Evolving and Dynamic - tax and regulatory scenario in India Ketan Dalal, Sandeep Chaufla and Prerna Mehndiratta Paris, 28 November 2013

www.pwc.in

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Presentation structure

Slide 2

November 2013 Evolving tax and regulatory scenario in India

Macro economic and tax environment

Doing business in India

Transfer pricing

Mergers and Acquisitions

Indirect taxes

Key take-aways

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Macro economic and tax environment

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Economic environment

• Economy slowed down in CY 13; picking up pace again

• Goldman Sachs upgraded India's rating

• Foreign exchange volatility; attaining stability now

• Inflation to average around 6%

• Populist measures as country approaches the general elections

Slide 4

November 2013

GDP Growth

CY 2013 CY 2014

China

India

Emerging and developing economies

Advanced economies

7.6%

3.8%

4.5%

1.2%

5.1%

7.2%

5.1%

2.0%

Source: World Economic Outlook , The IMF

Evolving tax and regulatory scenario in India

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Tax environment – the big picture

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November 2013

• MNCs high on radar

− Higher visibility and scrutiny of cross border transactions

− Withholding tax defaults closely audited; prosecution proceedings

− Cyprus notified as a non-co-operative jurisdiction

• Yet, several moves towards a responsive and less adversarial tax regime

− Soul searching on retrospective amendments

− GAAR : legislative provisions deferred

− Tax Administrative Reforms Commission set up

− DTC expected to simplify tax regime

− Safe harbour rules introduced

− APAs : pragmatic approach, initial response encouraging

Evolving tax and regulatory scenario in India

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Legislative GAAR deferred

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• Implementation deferred by two years; though judicial GAAR exists even today!

• Applies to tax benefit obtained on/after April 1, 2015 from arrangements entered on any date. Overrides tax treaty.

• Rules notified in Sept-GAAR inter-alia not to apply :

- if tax benefit less than INR 30 mn (Euro 350,000)

- on investments made before 30 August 2010

• GAAR Approving Panel to include independent members

• Commercial rationale is key safeguard against GAAR

• Advance ruling allowed for both residents and non-residents

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Companies Act, 2013

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• Several sections notified - expected to be fully notified by March 2014

• Key highlights

- Related party transactions ring-fenced

- Stricter regime for private companies

- Auditors rotation

- FY: 31 March

- Inter corporate loans/ investments restricted

- Duties and liabilities of Directors/ KMP widened

- Restriction on layers of investment companies

- Fast track mergers

- Cross border mergers concept introduced

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LLPs vs. Companies

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About LLPs

• Permitted in India since April, 2009

• Much less onerous compliances compared to requirements under Companies Act

LLPs and FDI

• FDI in LLPs allowed with approval from FIPB in sectors where 100% FDI is allowed through Automatic route (see next slide)

• LLPs with FDI cannot make downstream investment/ raise foreign currency loans

LLPs and Tax

• No Dividend Distribution Tax

• Less onerous AMT applies, not MAT that applies to Companies

• More flexibility in structuring LLP agreement

AMT applies to taxable income as

adjusted by specified deductions; not to

book profits

AMT does not apply to tax-exempt long-term capital gains

November 2013

Evolving tax and regulatory position in India

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Conversion to LLPs

• Only firms, private and unlisted companies Who can convert

• Exemption for very small companies converting

• However, there are potential conversion options with limited tax exposure

Is conversion tax-free?

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November 2013 Evolving tax and regulatory position in India

Merger/ Demerger into Newco followed by conversion

Graded migration

Transfer business to LLP at Book Value

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Key regulatory changes

Relaxation of ECB norms Liberalisation of SEZ

framework FDI/ ODI

• Definition of infrastructure

widened

• Revision in maximum limits

• Permitted for general

corporate purpose under

approval route (minimum

average maturity of 7 years)

• Lower minimum land area

requirement for multi-

product & sector-specific SEZ

• No minimum area

requirement for IT /ITeS

• Graded scale for minimum

land area criteria, sector

broad-banding, land vacancy

issues & exit policy for SEZ

units

• Overseas investment limits

for Indian Companies

reduced from 400% to

100% of net worth

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Outlook on Tax Treaties

• TRC required as evidence of residential status to qualify for treaty benefit

- Specified particulars to be furnished to the IRA if not provided in the TRC

- Judiciary consistently upholding eligibility for treaty relief basis TRCs

• Mauritius treaty

- has prescribed conditions for creation of “substance” – effective January 1, 2015

- renegotiation of treaty expected – LoB likely to be introduced

• Revenue remains aggressive in its stand– substance over form applied

• Some unilateral steps by India to override treaty benefits

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Doing business in India

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Overview of Tax Rates subject to tax treaties

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* Including all surcharges and cesses; highest slab rates

S. No. Particulars Rates *(%)

1 Domestic company 33.99

2 Foreign company-branch, project /other PE 43.26

3 MAT 20.961

4 DDT 16.995

5 BBT 22.66

Buyback Tax • Shareholders are exempt (tax borne by company buying back shares) • Not linked to availability of accumulated profits • Distributed income = consideration paid less amount received on issue • Credit of BBT in home country may not be available

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Tax holidays and incentives

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Tax holiday/ incentive Period of exemption

Power generation • 100% of profits and gains

• 10 years in a block of 15 years

• Sunset –commence operations March 31, 2014

SEZ • 100% of export profits - 5 years

• 50% of export profits - 5 years

• 50% of export profits, subject to transfer to reserves- 5 years

• DTC expected to introduce sunset clause

• Exemption from MAT withdrawn

In – house research 200% deduction - extended till 31st March, 2017

Approval from competent authority required

Evolving tax and regulatory scenario in India November 2013

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PE risk assessment

• PE challenges on the increase

• Tax due, penalties and interest

• Filing requirements

• Prior years scenario

• Knock-on impact for other taxes (Payroll, VAT / service tax)

• Knock-on effect for the same type of tax (withholding tax, creditable taxes, etc)

Service

PE

Fixed place

of business

PE

Agency PE

Te

ch

nic

al T

hre

sh

old

/ T

axp

aye

r F

ocu

s

PE rule

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PE strategy critical;

address the quantum!

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Adhoc attribution/ recent judicial trends • Adhoc attribution by the Revenue

Some judicial analysis on profit attribution

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Particulars Profit Attribution

Taxability of offshore supplies where PE performed certain activities

20% of proportionate profits based on global profits

Taxability of offshore supplies where PE performed marketing activities

35% of profit (50% manufacturing, 15% R&D)

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Engineering, procurement, construction contracts

• Typical scopes of work:

- Offshore supply, offshore services

- Offshore supply, onshore services

• Typical challenges:

- Consortium contract – AOP exposure

- Project office of the Foreign Co for onshore scope

- Constitution of PE of foreign company; taxability of offshore supplies

• Safeguards:

- Bidding documents to reflect the contractual understanding

- Separate contracts for distinct scopes of work, remuneration

- Coordination agreement

- AAR for predetermination of tax liability?

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India inbound expat assignment structures

• Varying degrees of PE exposure: Morgan Stanley, Verizon

• Typical models:

- Legal employment in India

- Dual employment

- Secondment

- Manpower supply arrangements

• Foreign Exchange - Restrictions on payment of salary in bank account outside India

• Tax issues on reimbursement of salary cost

• Social security contributions in India

• Service tax on cross charges

Documentation is key

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India-France treaty – certain special dimensions

• PE clause

- No reference to supervision activity; hence slightly narrow in EPC context.

- Vis-à-vis agency PE, reference to ‘concludes contracts’ not extended to ‘secures orders’.

- Attribution of profits to PE- restricted/ clarified by protocol to the treaty

• MFN clause FTS/ royalty; restricts scope or rate – India-Portugal/ India-Finland tax treaties

• Royalties includes equipment trigger; withholding rate is 10% on gross for all royalties

• Capital gains (other than on items specifically covered) taxable only in country of residence

• Loans endorsed/ extended by COFACE exempt

• Bilateral APA in absence of sub clause (2) in Associated Enterprise article?

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Dispute resolution - overview

• Strategy for dispute resolution critic – proactive, not reactive

• Some dimensions:

- Alternative forums for dispute resolution

- Prevention better than cure (AARs/ APAs)

- Recurring vs one time

- Payment of demand

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High profile litigations: indirect transfers/ equity infusion

Vodafone

Indirect transfer sought to be subjected to WHT

Supreme Court decision favourable

Retrospective amendment –has been

challenged

No action to collect tax Expert Committee to

review law

Committee has criticised retro amendment

Relief for Indirect transfers

F Co 1

F Co 2

I Co

Sale

Slide 21


Shell

Capital infused into Indian 100% sub

Capital Infusion arguably

“undervalued”

“Undervaluation" sought to be taxed

as income!

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Indirect transfers: uncertainty continues

• Term ‘substantially’ not defined

• Term ‘substantial’ is defined in the Oxford Dictionary to mean ‘of considerable importance, size, or worth’

• Issue arises as to whether substantial is :

- 26%

- 51%

- ~100%

• No legislative clarity at present

• No exemption on intra- group transactions / restructurings

• No minimum threshold specified

• Timing of clarity could be impacted by Vodafone “settlement”

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Transfer pricing

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The landscape

• Greater focus on intercompany payments/ service arrangement

• High on agenda - royalty payouts, management charges closely audited

• Intangibles is a key area of focus:

− Profits from intangibles should not be divorced from value creation

− Special measures for transfer of hard-to-value intangibles

• Robust documentation required to demonstrate:

− Benefit received

− Arm’s length price

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Transfer Pricing Audit Environment in India

Slide 25

Policy Environment

• Focus on establishment of a non-adversarial tax regime

• Rangachary committee for recommendations on safe harbours

• Shome committee for tax reforms

Legal Environment

• APAs gathering momentum - 146 applications filed

• Norms for development centers to qualify as contract R&D centers

• Safe harbor regime for IT, ITeS, R&D services

• Balanced approach of the Tribunal

Practical Challenges

• TP adjustments in excess of US$ 28 billion over 8 audit cycles

• TP adjustments worth US$ 12 billion in FY 08-09

• More than 3,200 cases audited - Adjustments in over 50% of cases

• High adjustments for IT, BPO & KPO


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India – Safe Harbour Rules

Eligible International transaction

Rate for international transaction

Rate subject to Limits

Provision of ITes 20% Turnover <= INR 5 bn (Euro 58.9 Mn)

22% Turnover > INR 5 bn (Euro 58.9 Mn)

• Effective from FY 2012-13 and subsequent 4 years.

• Rates prescribed are tabulated below:

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India – APA scenario

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• Unilateral, bilateral and multilateral APAs allowed

• Allows flexibility during the process Types of APA

• Up to five years

• Roll-back not specifically provided for Term

• Besides revenue officials, the APA team to include experts in economics, statistics, law, etc.

APA team

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Mergers and acquisitions

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Acquisition financing

• No end use restrictions

• 75% limit in List Co

• Dividend distribution tax (DDT) @ 17%

• Treated as FDI

• No end use restrictions

• Conversion terms upfront

• To be converted on listing

• WHT – 10/15%

• No interest deduction for share acquisitions

• End use - downstream permitted

• Eligible lenders – FIIs/ QFIs

• Coupon restrictions: Redeemable ~ 14.5%

• WHT - 5.41%

− Interest upto May 31, 2015

− Else 10/15%

• No interest deduction for share acquisitions

Equity ECB FCDs Listed NCBs

Funding options

• End use restrictions for downstream acquisitions

• Allowed for working capital (approval route)

• Avg. maturity-5 years

• Coupon restrictions

• Withholding tax @ 5.41% (limited window)

• Lender’s equity holding > 25% , debt/ equity - 4:1

Slide 29


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Entry Strategies... Direct Route vs Intermediary Holding Company

Slide 30


Direct Route

F Co

I Co

IHCo Route

F Co

IHCo

I Co

India

O/S France

India

Identified tax efficient jurisdictions considered for IHCo based on India tax treaties:

1. Singapore (LOB clause)

2. Mauritius (no substance required? – only TRC)

3. Netherlands (Transfer from non-resident to non-resident - capital gains are exempt)

Prudent to have substance at IHCo level

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Indirect taxes

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Indirect Tax Structure in India – An Overview

Slide 32

Central Levy State Levy

Customs Duty

Excise Duty

Service Tax

CST

VAT

Entry tax/ Octroi

Co-existence of federal and state taxes – dual VAT

Dual GST expected in next 3 years September 2013

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Key take-aways

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Key take-aways

• Several changes including DTC on the anvil

• Litigious environment with continuing revenue department’s aggression, and consequent role of judiciary

• Safe harbour rules, APA, etc are recognition of need to address tax concerns

• Approach towards disputes

- Cautious ... and yet, guard against action paralysis

- Dispute prevention strategy crucial (Advance Rulings, APA etc), especially given delays in resolution

• Indirect transfer provisions to remain a challenge – resolution only after 2014

• Regulatory scenario to remain dynamic –spill-over tax impact

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Three steps forward – Two steps backward Net movement – forward!

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Glossary

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Abbreviations

AAR Authority for Advance Rulings

AMT Alternate Minimum Tax

AoP Association of Persons

APA Advance Pricing Arrangements

BBT Buy-back Tax

BPO Business Process Outsourcing

COFACE Compagnie Française d'Assurance pour le Commerce Extérieur

CST Central Sales Tax

CY Current year

DDT Dividend Distribution Tax

DTC Direct Tax Code

ECB External Commercial Borrowings

EPC Engineering, procurement and construction

FCD Fully Convertible Debentures

FDI Foreign Direct Investment

FII Foreign Institutional Investor

FIPB Foreign Investment Promotion Board

FTS Fees for Technical Services

FY Financial year

GAAR General Anti-Abuse Rules

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Glossary

Slide 36


Abbreviations

GDP Gross Domestic Product

GST Goods and Service Tax

IHC Intermediary Holding Company

INR Indian Rupee

IRA Indian Revenue Authorities

IT Information Technology

ITes Information Technology Enabled Services

KMP Key Managerial Personnel

KPO Knowledge Process Outsourcing

LLP Limited Liability Partnership

LoB Limitation of benefits

MAT Mimimum Alternate Tax

MFN Most Favoured Nation

mn Million

MNC Multi National Company

NCB Non Convertible Bonds

ODI Outbound Direct Investment

PE Permanent Establishment

QFI Qualified Foreign Investor

R&D Research and Development

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Glossary

Slide 37


Abbreviations

SEZ Special Economic Zone

TP Transfer Pricing

TRC Tax Residency Certificate

VAT Value Added Tax

WHT Withholding Tax

Thank You

© 2013 PricewaterhouseCoopers Private Ltd. All rights reserved. “PwC”, a registered

trademark, refers to PricewaterhouseCoopers Private Limited (a limited company in India) or,

as the context requires, other member firms of PwC International Limited, each of which is a

separate and independent legal entity.

Ketan Dalal Joint Tax Leader PwC India Email : [email protected] Tele : +91 22 6689 1422 Cell : +91 98200 39516

Sandeep Chaufla Executive Director – Direct Tax Practice PwC India Email : [email protected] Tele: +91 124 3306001 Cell : +91 98100 29154

Prerna Mehndiratta Associate Director – M&A Practice PwC India Email : [email protected] Tele: +91 124 3306024 Cell : +91 98731 55480

Renaud Jouffroy Attorney at law, Partner – Hauts-de-Seine Bar

Landwell & Associés, société d’avocats

Member of the PwC international network

Email: [email protected]

Tele: +33 (0)1 56 57 42 29

Cell: +33 (0)6 81 95 12 55

www.landwell.fr

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