International Tax Structuring
Dec 25, 2015
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 people—depending upon their responsibilities within a company; but if its done correctly it can relieve (sometimes) onerous financial burdens that can inhibit a company’s development.
• An integrated international tax program which takes careful account of all of a company’s tax exposures can free up precious capital that can be redirected to the firm’s long-term benefit.
• Tax Residency
• Permanent Establishment
• Transfer Pricing
• Substance
• Due Diligence
• Anti Avoidance/Abuse/Tax Risk Management
• Treaty Shopping/WHT issues
Issues Underlying Tax Structuring
Cross border transaction imperatives
Cross Border Transactions
Cross Border Transactions
Legal & regulatory framework
Identifying and delivering synergies
Tax regimes & treaties
Business Dynamics
Business Environment
Cultural Issues
Accounting treatment
Cross border transactions
Cross border transactions
Exit considerations
Cash repatriation
Debt Structuring
Income flows and their taxability
Entry Strategy
Financing options
1
2
3
4
5
6
Key tax and financial considerations
• 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 don’t work out (tax efficient exit)?
The Five Questions of Tax Structuring
Asset PurchaseTarget Structure Acquisition Structure
Parent Company
Holding Company
Target Company
Parent Company
Holding Company
Target Company
Acquirer
Acquisition Co.
Share Purchase
• Acquirer sets up Acquisition Company in Target Country• Acquisition Company purchases Assets/Business of Target Company for
cash consideration
How should you acquire it ?...
SPV Options• Company• Branch / Liaison office• Trust• LLPs
Applicable Tax Laws• Host Country• Target Country• SPV Jurisdiction• Tax Treaties
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
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
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
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
How will you minimize tax incidence on Profits ?
Income stream and their taxability
Income streams Principles for evaluation
Dividends
Capital Gains
Interest
Other royalty / brand fees /technical Services / management services
• 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
Key elements – arm’s length principle, documentation, overall tax costs and foreign tax
credits
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
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
Transfer of intermediary foreign company’s shares - Vodafone Case
Mechanics
• CCo1 sold its stake in CCo2 to Acquirer
UK CoUK
Acquirer NCo
I Co
CCo1
CCo2
Ne
the
rla
nd
sC
ay
ma
n I
sla
nd
Ind
ia
Issue
• Revenue Authorities contend that this transfer is taxable in India since the “controlling interest” in Indian Asset is transferred
Mauritius Co
Ma
uri
tiu
s
Through downstream
subsidiaries
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 ?