International Tax Structuring

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International Tax Structuring
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Tax Structuring

• Tax Structuring is defined as a form into which
  business or financial activities may be organized
  to minimize taxation.
• An important part of tax structuring is deciding
  how to set up a business before commencing
  operations. A business may run as a sole
  proprietorship, general partnership, limited
  partnership, corporation or limited company.  
• International tax structuring means different
  things to different peopledepending upon their
  responsibilities within a company but if its
  done correctly it can relieve (sometimes) onerous
  financial burdens that can inhibit a companys
  development.
• An integrated international tax program which
  takes careful account of all of a companys tax
  exposures can free up precious capital that can
  be redirected to the firms long-term benefit.

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Issues Underlying Tax Structuring

• Tax Residency
• Permanent Establishment
• Transfer Pricing
• Substance
• Due Diligence
• Anti Avoidance/Abuse/Tax Risk Management
• Treaty Shopping/WHT issues

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Cross border transaction imperatives
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Key tax and financial considerations
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The Five Questions of Tax Structuring

• What should you acquire (assets or shares)?
• How should you acquire it (holding company
  issues)?
• How will you pay for it (tax efficient funding)?
• How will you use profits (maximizing dividend
  flows)?
• What if things dont work out (tax efficient
  exit)?

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What should you acquire?

• Share Purchase
• Asset purchase
• Merger, Demerger, etc

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Asset Purchase

• Target Structure

• Acquisition Structure

Parent Company
Acquirer
Parent Company
Holding Company
Holding Company
Acquisition Co.
Target Company
Target Company
Share Purchase

• Acquirer sets up Acquisition Company in Target
  Country
• Acquisition Company purchases Assets/Business of
  Target Company for cash consideration

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How should you acquire it ?...

• SPV Options
• Company
• Branch / Liaison office
• Trust
• LLPs
• Applicable Tax Laws
• Host Country
• Target Country
• SPV Jurisdiction
• Tax Treaties

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Need for an Overseas Holding Company (OHC)

• Taxation of foreign dividends in India
• Retention of profits in offshore jurisdiction
• Deferment of tax
• Greater flexibility for inter-company transfer
  of funds and for setting up operations in other
  overseas jurisdictions
• Future restructuring easy
• Better tax regime within European Union

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Investors Considerations when choosing OHC

• Receive dividends and capital gains tax free
• - Corporate Tax (Participation)
  Exemption
• Tax efficient repatriation of profits
• - Reduced Witholding of Profits
• Controlled Foreign Company (CFC) legislation
• Finance companies mechanism
• Flexible reorganizations
• Reliable tax authorities - Rulings
• Non tax driven considerations, e.g. IPO,
  exchange control regulations, protection IPR

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How should you acquire it ?

• Considerations
• Capital Gains
• Local taxes and underlying credit of foreign
  taxes
• Withholding Taxes Interest, Dividends
  and Royalties
• Controlled Foreign Corporation Rules
• Thin Capitalization Norms
• - Debt Vs Equity
• Ability to push up / down debt cost
• Valuation of intangibles
• Accounting (Consolidation)
• Stamp Duties

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How will you minimize tax incidence on Profits ?

• Direct Tax
• Tax Incentives
• Utilisation of B/f tax losses
• Group Relief
• Revenue
• - Operating arrangements Revenue vs
  Capital
• Expenses
• - Interest - Double dip
• Treaty Shopping
• Indirect taxes
• Stamp Duty
• Integration
• Indirect Taxes
• - Tax arbitrage from VAT via export and import
• Transfer Pricing

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Income stream and their taxability
Income streams
Principles for evaluation
Dividends

• Interest, TS and royalty can flow independent of
  ownership pattern
• TS and royalty would typically flow to an
  operating entity, which possess technical
  capabilities
• Principal drivers are tax costs associated with
  dividend flows and gains on disposal of shares
• Brand fee would flow to the IPR company

Capital Gains
Interest
Other royalty / brand fees /technical Services /
management services
Key elements arms length principle,
documentation, overall tax costs and foreign tax
credits
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How will you minimize tax incidence on
Repatriation?

• Dividend
• Buy back / Reduction / Redemption of Preference
  Capital
• Debt Repayment
• Royalties, Fees for Technical Services, etc
• Advances / Loans / Investments

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How will you plan tax-efficient exit?

• Use of Multi layered Structure
• Capital Gains in Tax Free Jurisdiction
• Sale of Foreign Assets
• Merger / Winding Up
• Taking advantage of Tax Incentives / Exemptions
• LTCG Listed Companies

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Transfer of intermediary foreign companys shares
- Vodafone Case
Mechanics
UK Co
UK

• CCo1 sold its stake in CCo2 to Acquirer

Acquirer NCo
Issue
Netherlands

• Revenue Authorities contend that this transfer is
  taxable in India since the controlling interest
  in Indian Asset is transferred

CCo1
Cayman Island
CCo2
Through downstream subsidiaries
Mauritius Co
Mauritius
I Co
India
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Debatable issues after Vodafone Case

• What is the subject matter of transaction ?
• Is transfer of interest in subsidiary merely a
  mode of transfer of interest in the downstream
  company ?
• Does consideration paid or payable represents the
  value of assets of intermediary or of the
  downstream company ?
• What is the effect of declarations made by the
  parties to the transaction to their respective
  shareholders and / or to their regulatory
  authorities ?

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• THANK YOU