Corporate Restructuring

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Corporate Restructuring
Presentation by Rahul Garg Executive Director
PricewaterhouseCoopers
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Commercial Factors Affecting Cross Border
Investment

• Common reasons
• Location of customers
• Quality and location of workforce
• Entering new markets
• Economic environment
• Potential issues
• Regulatory issues
• Taxation matters

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Developing the tax policy - Common components

• Tax planning should positively enhance
  shareholder value.
• The groups tax and legal structure should be low
  maintenance
• The groups planning should be low/no risk
• Tax planning should accommodate commercial
  strategy
• Tax planning should not impede dividend servicing
  requirements
• Increasingly, the impact of the tax planning on
  corporate reputation needs to be assessed

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Developing the tax strategy - Possible
requirements

• Dividends from abroad tax free
• Capital gains on the sale of foreign
  shareholdings
• Capital gains on the sale of domestic
  shareholdings
• No further taxation on domestic dividend income
• Financing costs deductible
• Ratio of shareholder debt and equity
• Exemption of foreign branch profits and
  deductibility of foreign branch losses

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Developing the tax strategy - Possible
requirements (continued)

• Wide treaty network with low or reduced WHT
• EU membership
• Group taxation
• Unlimited loss carry forward
• Capital duties
• Stamp duties
• Low social security taxes
• Sales taxes

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Developing the tax strategy Core considerations

• Pooling of dividends and cash
• Tax efficient borrowing/lending
• Tax efficient royalty flows
• Capital gains tax exemptions
• Minimise withholding taxes
• Review of business models
• Reduction in global tax rate

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Best in class structures
Finance debt related strategies
Tax burden
Profit migration e business related strategies
Emigration related strategies
Inverted
Multi-national
Regional/entrepreneur
Business model
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Foundation structure Traditional multinational
Shareholders

• Observations
• Discrete operations in specific countries
• Debt pushdown to minimise foreign tax
• Tax efficient lending creates low tax profit
• IHC to manage CFC and deferral

Parent
Tax efficient finance vehicle
InternationalHolding Company
Local HoldCo 1
Local HoldCo 2
Local OpCo 2
Local OpCo 1
Country 2
Country 1
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Best in class structures Regional/Entrepreneur
structure

• Observations
• Centralised functions and services
• Regional/global operations
• E-procurement and e-sales
• Minimise profits in high tax operations
• Maximise profit in low tax entrepreneur
• Activities of entrepreneur address CFC position
  (if any)

Parent Company
Holding Company
Sales Agent
Manufacturer/ Developer
Principal Entrepreneur
Suppliers
Commission
Toll manufacturing agreement
Customers
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Can we apply this thinking to India?

• Indias System in outline
• Relief for withholding taxes on royalties,
  interest and dividend income
• No relief for underlying tax credits on
  dividends repatriated from overseas
  subsidiaries leading to double taxation on
  profits
• Indian tax on Capital Gains on disposal of
  subsidiary holdings
• No controlled foreign corporation regime
• Answer Possibly

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Close

• Taxation and market forces often dictate a
  structure for multinationals
• There are constant changes in the regulatory
  and taxation fields which impact on
  desirable structures
• There are considerable opportunities for Indian
  companies venturing abroad
• A definite need to constantly monitor the
  corporate structure

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Restructuring
Restructuring
Stock sale
Mergers/ Amalgamation
Demerger / Spin off
Asset purchase
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Amalgamation
Shareholder X
Shareholder Y
Shareholders X Y
Company X Ltd..
Company Y Ltd..
Company XY Ltd.
Cement Unit
Cement Unit
Cement Unit

• Merger of one or more company into another or
  merger of companies to form another company
  provided
• 75 in value of the shareholders of amalgamating
  company must become shareholders of the
  amalgamated company (Sec 2(1B))
• Amalgamation - Direct tax neutralized
• No income to amalgamating company/shareholders on
  the transfer of business undertaking/receipt of
  income. (Sec 47(vi))
• Depreciation to amalgamated company on the basis
  of tax w.d.v in the hands of the amalgamating
  company (Explanation 7 to Sec 43)
• Accumulated losses and unabsorbed depreciation of
  amalgamating company can be carried forward by
  the amalgamated company if specified conditions
  are fulfilled. (Sec 72A)

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Demerger
Promoter - 40
Public - 60
Promoter - 40
Public - 60
Company(RC)
Company(DC)
Company (DC)
Cement Unit
Steel Unit
Cement Unit
Steel Unit

• Transfer of business undertaking as a going
  concern by one company (DC) to another company
  (RC) pursuant to a court Scheme subject to
  fulfillment of following conditions (Section
  2(19AA))
• All properties and liabilities of the business
  undertaking are transferred at book values
• Shares of the RC are issued to the shareholders
  of the DC on a proportionate basis
• Shareholders holding not less than 75 in value
  of the shares of the DC become shareholders of
  the RC

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Asset purchase
Promoter - 40
Public - 60
Promoter - 40
Public - 60
Y Ltd..
Company X Ltd..
Company X Ltd..
Cement Unit
Steel Unit
Cement Unit
Steel Unit

• Transfer of business undertaking as a going
  concern for lump sum consideration without values
  being assigned to individual assets and
  liabilities.(Section 2(42C)
• Transferor Company
• Transferor Company liable to short/long term
  capital gains (holding period 36 months)(Section
  50B)
• Capital gains computed by deducting net worth
  from the sale consideration
• Step up of Depreciation - possible as transferee
  entitled to depreciation on the cost of
  assets.(Section 32 72) Valuation of assets
  required

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Stock Sale

• Liable to long term capital gains depending on
  the period of holding (holding period 12 months)
• In case of shares listed on a recognised stock
  exchange in India
• Subject to securities transaction tax instead of
  Capital gains tax
• Deduction under section 88E of STT available if
  income under PGBP' includes any income from
  taxable securities transactions

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Tax issues Mapped

• For Transferor
• Carry forward of loss / depreciation
• Capital gains tax.
• Transfer pricing.
• Tax avoidance device
• Business closure
• Diversion of income at source.
• Depreciation.
• Tax impact of alternate funding.
• Staggered consideration.
• Capital receipt.
• Allocation of common assets / liabilities.

• For Transferee
• Carry forward of loss
• Production / asset holding criteria.
• Depreciation on tangible / intangibles.
• Tax credit under MAT.
• Deduction for 43B liabilities.
• Deduction for liabilities of predecessor /
  remission of liabilities.
• Cost of acquisition / fair market value.
• Continuity of tax exemptions / deductions.
• Restatement of value.
• Succession of business tax liabilities

• For Shareholders
• Deemed dividend
• Capital gain / loss
• Consideration in kind / staggered
  consideration.
• Short term / long term capital assets
• Cost of acquisition
• Transfer pricing
• Treaty protection
• Foreign tax credit
• Underlying tax credit
• Tax sparing on exempt income
• Tax avoidance

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Long term tax Objectives

• Reduce Dividend distribution tax
• Opportunities to utilize losses.
• Step up of tax depreciation base.
• Reduced administrative cost.
• Transfer pricing asymmetry.
• Flexibility of allocating common expenses.
• Impact on quantification of tax incentives.
• Possibility of depreciation on intangibles
• Mitigation of minimum alternate tax.
• Impact on tax incentive of change in holding /
  migration of business.
• Tax optimization by alternate funding methods.

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Thank you