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General Anti Avoidance Rules (‘GAAR’) - Case Studies

General Anti Avoidance Rules (‘GAAR’) - Case Studies. Pranav Sayta IFA India WRC Conference : July 2012. GAAR : Case studies - Contents. Case Study 1 : Inbound Investments from Mauritius Case Study 2 : Intra Group Reorganization Case Study 3 : Singapore based Group

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General Anti Avoidance Rules (‘GAAR’) - Case Studies

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  1. General Anti Avoidance Rules (‘GAAR’) - Case Studies Pranav Sayta IFA India WRC Conference : July 2012

  2. GAAR : Case studies - Contents • Case Study 1 : Inbound Investments from Mauritius • Case Study 2 : Intra Group Reorganization • Case Study 3 : Singapore based Group • Case Study 4 : Private Equity Investment • Case Study 5 : Buyback of Shares • Case Study 6 : Funding by CCD’s & ECB’s • Case Study 7 : Right to Choose?

  3. Case study 1 – Inbound investment from Mauritius • US Co is a company incorporated in the United States of America (‘USA’) and a tax resident of USA • US Co is a global conglomerate having subsidiaries in various jurisdictions across the world • US Co has set-up 100 percent subsidiary in Mauritius, M Co • M Co is a tax resident of Mauritius, holding a tax residency certificate issued by the Mauritius Revenue Authorities • M Co was set-up to act as a holding company for investments into India and other Asia Pacific countries • M Co has two full time employees and has taken office premises on rent in Mauritius • Board meetings of M Co are held in Mauritius once a quarter for taking business decisions

  4. Case study 1 – Inbound investment from Mauritius US Co • M Co has set-up 100 percent subsidiaries in India, I Co 1 and I Co 2 • I Co 1 and I Co 2 are operating companies • This structure has been in place since the year 2003 • M Co sells the shares of I Co 1 in Financial Year (‘FY’) 2013-14 USA 100% M Co Mauritius 100% I Co 1 I Co 2 Overseas company

  5. Case study 1 – Inbound investment from Mauritius Points for discussion • Can GAAR be invoked by the tax authorities in the above case? • Reasons on account of which GAAR can/ cannot be invoked • What are the consequences in case GAAR is invoked by the tax authorities?

  6. Case study 2 – Intra group reorganization • US Co is a company incorporated in USA and a tax resident of USA • US Co has a 100 percent subsidiary in Mauritius, M Co • M Co is a tax resident of Mauritius, holding a tax residency certificate issued by the Mauritius Revenue Authorities • M Co has a 100 percent subsidiary in India, I Co • I Co is an operating company

  7. Case study 2 – Intra group reorganization US Co 100% • As part of the group reorganization, M Co sells shares of I Co to S Hold Co, a Singapore company in December 2012 at fair market value • M Co had purchased the shares for Rs 10 in the year 2002 • M Co sells the shares in December 2012 for Rs 100 • S Hold Co is also a 100 percent subsidiary of US Co and is set-up to act as a holding company for Asia Pacific region • Group has its regional headquarter in Singapore and also has significant operations in Singapore through S Op Co USA 100% S Hold Co M Co Mauritius Sale of I Co shares Singapore 100% I Co India

  8. Case study 2 – Intra group reorganization US Co 100% • S Hold Co and S Op Co are tax residents of Singapore, holding a tax residency certificate issued by the Singapore Revenue Authorities • S Hold Co’s expenditure in the previous 2 years have been USD 225,000 per annum • S Hold Co sells the shares of I Co in FY 2014-15 USA 100% S Hold Co M Co Sale of I Co shares Singapore Mauritius 100% I Co India

  9. Case study 2 – Intra group reorganization Points for discussion • Can GAAR be invoked by the tax authorities in the above case? • Reasons on account of which GAAR can/ cannot be invoked • What are the consequences in case GAAR is invoked by the tax authorities?

  10. Case study 3 – Singapore based group S Co • S Co is the ultimate parent company of a Singapore based group and is an operating company • Group has significant business operations in Singapore • S Co 1 is the group’s holding company for overseas business interests • S Co and S Co 1 are tax residents of Singapore holding a tax residency certificate (TRC) issued by the Singapore Revenue Authorities • S Co 1 has a subsidiary, M Co which has invested into India • M Co is a tax resident of Mauritius, holding a TRC issued by the Mauritius Revenue Authorities • M Co holds 100% shares of an Indian company I Co 100% S Co 1 100% M Co Outside India Inside India 100% I Co

  11. Case study 3 – Singapore based group S Co • Negotiations are in progress with potential buyers which could result in: • M Co selling the shares of I Co in FY 2013-14; or • S Co 1 selling the shares of M Co in FY 2013-14 100% S Co 1 100% M Co Outside India Inside India 100% I Co

  12. Case study 3 – Singapore based group Points for discussion • Can GAAR be invoked by the tax authorities in the above case? • Reasons on account of which GAAR can/ cannot be invoked • What are the consequences in case GAAR is invoked by the tax authorities?

  13. Case study 4 – Private Equity Investment Investor1 Investor2 Investor 3 • US based fund manager launches a Private Equity (PE) fund to raise capital from foreign investors for investment in India. The investors could be in various different jurisdictions. • Due to regulatory reasons and commercial considerations, the foreign investors cannot individually invest directly into the Indian companies (I Cos) • The fund manager has set-up an offshore vehicle, M Co, for pooling funds & investment into I Cos • M Co is a tax resident of Mauritius, holding a tax residency certificate issued by the Mauritius Revenue Authorities M Co Outside India Inside India I Cos

  14. Case study 4 – Private Equity Investment Investor1 Investor2 Investor 3 • M Co has engaged a US based fund manager as its investment manager • The fund manager in turn has engaged an Indian company to act as an investment advisor in India • All investment decisions are taken in the board meetings of M Co chaired from/held in Mauritius after considering the recommendations of US based fund manager • Board of directors of M Co comprises representatives from US based fund manager, a couple of Mauritius residents and some independent (non Indian) directors • M Co is likely to earn Capital Gains on sale of shares of I Cos M Co Outside India Inside India I Cos

  15. Case study 4 – Private Equity Investment Points for discussion • Can GAAR be invoked by the tax authorities in the above case? • Reasons on account of which GAAR can/ cannot be invoked • What are the consequences in case GAAR is invoked by the tax authorities?

  16. Case study 5 – Buyback of shares US Co • US Co is a tax resident of USA and has invested into India through a subsidiary, M Co • M Co is a tax resident of Mauritius, holding a tax residency certificate issued by the Mauritius Revenue Authorities • M Co holds 90 percent of the shares of company in India, I Co and balance 10 percent is held by unrelated parties • I Co has been paying 10 percent dividend regularly for last several years • I Co has significant accumulated profits 100% Unrelated parties M Co 90% Outside India Inside India I Co Unrelated parties 10%

  17. Case study 5 – Buyback of shares US Co • Board of directors of I Co believes inter alia : • Idle cash is available with I Co • There is a lack of good/convincing opportunities available for investment of idle cash • Buy-back seems a worthwhile option as per current share valuation (i.e currently, shares of I Co are valued at less than their potential) • While it is uncertain whether or not in the buy-back offer shares will be tendered by the unrelated parties, M Co is likely to tender shares in the buy-back offer 100% Unrelated parties M Co 90% Outside India Inside India I Co Unrelated parties 10%

  18. Case study 5 – Buyback of shares Points for discussion • Can GAAR be invoked by the tax authorities in the above case? • Reasons on account of which GAAR can/ cannot be invoked • What are the consequences in case GAAR is invoked by the tax authorities?

  19. Case study 6 – Funding by Compulsorily Convertible Debentures (‘CCDs’) and External Commercial Borrowings (‘ECBs’) UK Co • UK Co is a company incorporated in UK • UK Co is a tax resident of UK, holding a tax residency certificate issued by the UK Revenue Authorities • UK Co has a 100 percent subsidiary in Netherlands, N Co • N Co is a tax resident of Netherlands, holding a tax residency certificate issued by the Netherlands Revenue Authorities • N Co has a 100 percent subsidiary in India, I Co United Kingdom 100% N Co Netherlands 100% I Co India

  20. Case study 6 – Funding by CCDs/ ECBs UK Co • I Co had issued CCDs to N Co at a coupon rate of 10 percent • CCDs were issued on 1 January 2010 • CCDs are compulsorily convertible into equity shares of I Co on 31 December 2019 • I Co has also borrowed (ECBs) on 1 January 2009 from N Co, repayable on 31 December 2013 • I Co has been paying and will continue to pay interest on 31 December every year in respect of the ECBs and the CCDs (assume that the interest rate is at arms length & is compliant with exchange control regulations) United Kingdom 100% N Co Netherlands 100% I Co India

  21. Case study 6 – Funding by CCDs/ ECBs UK Co • Interest is claimed as an expense deduction and is also subjected to withholding tax • Capital structure of I Co is as follows: • Equity – 10 • Debt – 100 (CCDs of 60 and ECBs of 40) • I Co requires further funds for business purposes and has accordingly, approached N Co • I Co would be: • issuing additional CCDs on 1 July 2013 of 20 • Availing ECBs of 10 on 1 July 2013 United Kingdom 100% N Co Netherlands 100% I Co India

  22. Case study 6 – Funding by CCDs/ ECBs Points for discussion • Can GAAR be invoked by the tax authorities in the above case? • Reasons on account of which GAAR can/ cannot be invoked • What are the consequences in case GAAR is invoked by the tax authorities?

  23. Case study 7 – Right to choose? • S has acquired shares in an unlisted Indian company as follows: • Above shares in unlisted Indian company are held in dematerialized form in a demat account • S is contemplating sale of 40 shares • S transfers 50 shares from the above demat account 1, into a new demat account 2 • S thereafter sells 40 shares for Rs 125 per share & transfers/delivers 40 shares to the buyer’s demat account from his old demat account 1 Shareholder (S) Unlisted Indian company

  24. Case study 7 – Right to choose? Points for discussion • How will the Capital Gains of S be computed? • Can GAAR be invoked by the tax authorities in the above case? • Reasons on account of which GAAR can/ cannot be invoked • What are the consequences in case GAAR is invoked by the tax authorities?

  25. Case study 7 – Right to choose? Points for discussion : Is a Taxpayer entitled to exercise a choice so as to mitigate his taxes? For eg: • Choosing to do a Slump sale or an Itemised sale or a Demerger plus share sale • Choosing to sell shares of a WOS (wholly owned subsidiary) or the WOS selling the business • Choosing to do business in the form of an LLP or a Company • Having earned a Capital Gain, selling an asset whose value has dropped, in order to obtain set off of resulting loss • Etc, ….

  26. Thank You

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