Outbound Investments – structuring & related issues

1. Outbound Investments – structuring & related issues Western Region Chapter International Fiscal Association - India Branch Saturday, January 13, 2007

2. 1 Introduction 2 Entity Structure Planning 3 Contents International Acquisition Structuring 4 International Holding Structures 5 Post Acquisition Structuring 6 Way forward

3. Introduction

4. Recent trends in outbound investments • Indian companies increasingly focusing on outbound investments, fuelled by a strong economy and liberal exchange control regime • ODI will exceed FDI – FIRST TIME!!!: News reports • Indian Companies adopting acquisition-led growth strategy - Cross-border (outbound) Mergers & Acquisitions on the rise • Value of overseas acquisitions by Indian firms: 2006 – US$ 18.80 billion (173 deals) 2005 – US$ 7.64 billion (156 deals) 2004 – US$ 1.97 billion (73 deals) Some recently concluded big ticket deals News on other proposed big ticket buys

5. India Planning Foreign Country Planning • India tax-deferral planning • Achieving tax-efficient circulation of cash within foreign structure • Repatriation planning for mitigating India tax costs • Foreign Tax Credit Issues • Phase-out of export related (non-SEZ) incentives • Complex international tax environment in U.S./ Europe • Generally considered “high-tax jurisdictions” • Well developed/ codified anti-avoidance rules • International tax environment in most Asian countries still evolving • Local practices can differ from law • Aggressive enforcement • Increased tax/ transfer pricing risks as Indian companies globalize operations Key Considerations Outbound Structuring • Entity Structure Planning • Choice of entity for foreign operations • Structuring of International Acquisitions • Asset Purchase v Share Purchase • Acquisition Financing • International Holding Structures • Direct Holding v Use of Intermediate Holding • Choice of jurisdiction for Holding Company • Post-acquisition Structuring • Legal & business model integration of Target Group

6. Entity Structure Planning

7. Choice of Entity Structures Branch Incorporated Entity • Taxation in India deferred until repatriation • Possibility of economic double taxation on repatriation • Losses can be consolidated but inability to defer India tax • Income attribution issues Hybrid Entity • Can combine benefits of corporate form with flexibility of partnerships • Opportunities for tax arbitrage on account of conflict in classification

8. International Acquisition Structuring

9. Planning for International Acquisitions Basic Objectives Achieve tax-free step-up for underlying assets Tax efficient acquisition financing/ deduction for borrowing costs Acquisition Structuring – Share Purchase vs. Asset Purchase Acquisition Financing • Obtaining “step-up” in asset value • Preservation of tax attributes of Target (NOL, Business Credits, Foreign Tax Credits etc.) • Taxation of Vendor • Migration of Intangibles

11. Likely Benefits Profit extraction Possibility of avoiding withholding tax on royalty Deductible expense for Acquisition Company Royalty may be tax-exempt in IP Holding Company Tax deferral in India No India tax until repatriation from IP Holding Company Intangible Migration Structure Possible Structures Intangible Asset Sale IP Holding Co. Target Company License Royalty Tangible Asset Sale Acquisition Co.

12. Acquisition Financing • Leveraged v Non-leveraged Acquisition • Source country tax base erosion • Offset of financing cost against Target’s operating income • Minimize tax cost on interest income • Treaty planning for minimizing source country interest withholding tax • Possibility of achieving tax deferral in India on interest income • Use of leveraged Acquisition SPV for acquiring Target Co

13. Acquisition Company set-up in Target Country Can also be located in country which permits cross-border fiscal unity Acquisition Company “thinly capitalized” by debt Financing company located in favorable jurisdiction Acquisition Company uses debt for acquiring shares in Target Company Acquisition Company and Target Company file for “fiscal unity” Acquirer Acquisition Co. Target Co. Leveraged Acquisition Structure Debt financing Interest

14. International Holding Structures

15. Basic tax considerations • Tax treaty network with home and target countries(Mauritius, Netherlands, Singapore, Switzerland) • No / low corporate tax rate(Hungary, Mauritius, Cyprus, Singapore, Hong Kong) • No tax on capital gains(Mauritius, Cyprus, UAE, Bahamas, Bermuda, Singapore) • Participation exemption(Netherlands, Germany, Spain, Austria) • No / low dividend withholding taxes(Mauritius, Hong Kong, Cyprus) • Favorable tax credit regime Tax sparing - Mauritius, Malaysia, Singapore Underlying taxes - Mauritius, Singapore • Not tainted • Possibility of obtaining Advance Rulings (Netherlands, Switzerland)

16. Some popular holding company jurisdictions • SINGAPORE • SWITZERLAND • NETHERLANDS • BELGIUM • DUBAI • LUXEMBOURG • MAURITIUS

17. Proposed structures – Cypriot Holding / Finance Company Investor country Indian Co Dividend Cyprus Holding / Finance Co Cyprus Equity No withholding taxes No taxation on dividends & capital gains No capital tax 10% tax on finance income Dividend Interest Loan EU Opco EU Opco No withholding tax on interest payments No/5% withholding tax on dividends payments Interest expenses tax deductible EU, Russia and CIS Op Cos Source country

18. Favorable treaty network of Belgium EU Parent/ Subsidiary Directive Can help in reducing source-country withholding Participation exemption regime in Belgium New treaty between Belgium & HK Nil WHT on dividends No tax/ WHT in HK on dividends HK Holding Co. Indian Co. Belg. Holding Co. Operating Cos. Possible Structures – HK / Belgium Structure

19. Issues to consider • CFC regulations – presently in over 20 countries • Traditional holding company jurisdictions typically have low tax regimes • Checks to be undertaken • Test of control to qualify as a CFC • Income streams specified • Target countries identified • EU Parent-Subsidiary directive • Transfer pricing regulations • Pricing to avoid economic double taxation • Taxability of interest spreads, management fees, royalty, FTS • Safe harbor provisions • Thin capitalization rules • Debt-equity ratio permissible • Arm’s length test • Availability of advance rulings

20. Issues to consider • Transition from current structure to alternative structure • Potential capital gains tax exposure • Need to consider country-specific planning strategies • Anti-avoidance/ treaty shopping rules in operating countries • LOB article in US treaties could impact viability of structure for US holdings • Need to review qualifying conditions for participation exemption/ EU Directives • Migration of company / tax-residence

21. Post-Acquisition Structuring

22. Post-Acquisition Structuring • Tax planning opportunities from redesign of business model • Integrates tax planning into business change initiatives • Review of operating structure of acquired business • Alignment of business model with strategic objectives • Designing a tax-effective supply chain structure for achieving GETR optimization, increasing after-tax cash flow and enhancing shareholder value • Integration of Supply Chain structure with Investment Holding, Financing and Intangible Ownership structure Basic Objectives Tax-effective Supply Chain structuring Achieving Global Effective Tax Rate [GETR] optimization Ease of cross-border cash flows • Optimizing India tax incentives for exports • Minimizing foreign country tax costs • Enhancing shareholder value

23. Key tax issues • Conversion/ Migration related issues • Starting point for tax authorities • “Gap” between current and future local profit levels • Points challenged by tax authorities • Lack of commercial purpose/ substance in business change • Conduct of parties not consistent with agreements/ documentation • Transfer of Intangibles (patents, know-how, brand names, trademarks etc.) upon conversion and valuation • Deemed migration of “goodwill” upon conversion

24. Key tax issues • PE Exposure • Appropriate structuring of arrangement (including movement of personnel) to shield from PE exposure • Potential PE risk under Toller/ Commissionaire structures in some countries • Transfer Pricing • Appropriate documentation of allocation of functions/ risks to support lower income allocation to operating entities • Intangible valuation • Indirect Tax/ VAT • Not optimizing indirect taxes may reduce or negate corporate tax benefits

25. Way forward

26. Way forward • Fiscal incentives for outbound investments • Reduced taxability of foreign dividends • Introduction of underlying tax credits • Unilateral credits • Introduction of CFC norms to avoid abuse • Other suggestions?

28. Thank you