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

General Anti Avoidance Rules (‘GAAR’) – Case StudiesPranav Sayta21 September 2012

Page 2 India Tax Workshop 2012

Case studies

Page 3 General Anti Avoidance Rules (‘GAAR’) - Case Studies

Case studies

► Grandfathering/ Impact on existing structures

► On whom GAAR is to be invoked

► Right to choose

► Corresponding relief

► Corresponding relief

► SAAR/LOB v/s GAAR

Case study 1

Case study 2

Case study 3

Case study 4

Case study 5

Case study 6


Case study 1 – Grandfathering/ Impact on existing structures

Facts► 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 issued by the Singapore Revenue Authorities

S Co

N Co

100%

S Co 1

100%

I Co 1

Netherlands

Singapore

India

100%


Case study 1 – Grandfathering/ Impact on existing structures

► S Co 1 has a subsidiary, N Co which has invested into India

► N Co is a tax resident of Netherlands, holding a tax residency certificate issued by the Netherlands Revenue Authorities

► N Co holds 100% shares of an Indian company I Co 1 since January 2005

► Negotiations are in progress with potential buyers which could result in:

► N Co selling the shares of I Co 1 in FY 2013-14; or

► S Co 1 selling the shares of N Co in FY 2013-14

S Co

N Co

100%

S Co 1

100%

I Co 1

Netherlands

Singapore

India

100%


Case study 1 – Grandfathering/ Impact on existing structuresIssues for discussion

► Whether any entity in the structure could be subject to Income-tax in India on gains from sale of shares of I Co 1?

► On what grounds could the tax authorities invoke GAAR to assert taxability on any entity in the structure for gains from sale of shares of I Co 1?

► What could be the consequences/Income-tax implications in the hands of the entities in the structure in case GAAR is invoked by the tax authorities?

► Is there any tax avoidance arising due to the above structure?

► Whether tax avoidance has to be looked at point of investment or divestment?

► Whether there could be any implications for the buyer wherein GAAR is invoked on the seller?


Case study 2 – On whom GAAR is to be invoked

Facts

► F Hold Co 1 has a 100 percent subsidiary, F Hold Co 2

► F Hold Co 2 has a 100 percent subsidiary in India, Op Co

► Op Co has significant carried forward business losses (tax)

► F Hold Co 1 sells the shares of F Hold Co 2 to Acquirer Co in FY 2013-14

Outside India

Inside India

F Hold Co 1 Acquirer Co

F Hold Co 2 F Hold Co 2

Op Co Op Co

100%

100%

100%

100%

Sale of shares of F Hold Co 2



► Subsequent to above sale of shares of F Hold Co 2, Acquirer Co holds 100 percent shares of F Hold Co 2 which, in turn, holds 100 percent shares of Op Co

Outside India

Inside India

F Hold Co 1 Acquirer Co

F Hold Co 2 F Hold Co 2

Op Co Op Co

100%

100%

100%

100%

Sale of shares of F Hold Co 2



Issues for discussion

► Is there a tax benefit to any of the entities in the given case? And to whom?

► On what grounds could the tax authorities invoke GAAR in respect of the above transaction of sale of shares of F Hold Co 2?

► What would be the impact on set-off of carried forward losses of Op Co?

► What could be the consequences/ Income-tax implications in case GAAR is invoked by the tax authorities?


Case study 3 – Right to choose?

► 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

Unlisted Indian company

Shareholder (S)

Year Particulars No of shares

Cost per share (in Rs)

2007 Purchase 25 10

2009 Bonus 25 -

2010 Rights 50 100

Facts

► S has acquired shares in an unlisted Indian company as follows:


Case study 3 – Right to choose?


► Is the taxpayer entitled to exercise a choice so as to mitigate his taxes?

► On what grounds could the tax authorities invoke GAAR to assert taxability on S?

► What could be the consequences/Income-tax implications in the hands of S in case GAAR is invoked by the tax authorities?

► In case GAAR is invoked in respect of the present transaction, what would be the cost of acquisition when the balance 60 shares are sold by S?


Case study 4 – Corresponding relief

Facts► F Co is a foreign company► F Co has two 100 percent

subsidiaries in India – A Co and B Co

► During the year, A Co has divested its shareholding in X Co to an unrelated party► A Co has earned substantial long

term capital gains (on the above)

► A Co proposes to sell shares of Y Co to B Co at fair market value

► A Co would incur a substantial loss (long term) on account of the above

A Co

F Co

B Co

100% 100%

Sale of shares of Y Co

Outside India

Inside India

X Co

100%

Y Co

100%



► A Co would set-off the long term capital loss on sale of shares of Y Co against the long term capital gains earned on sale of shares of X Co

A Co

F Co

B Co

100% 100%

Sale of shares of Y Co

X Co

100%

Y Co

100%

Outside India

Inside India




► Whether the tax authorities can invoke GAAR on the above transaction of sale of shares of Y Co?

► What could be the Income-tax implications in the hands of A Co on the above transaction of sale of shares of Y Co?

► What could be the Income-tax implications in the hands of B Co if they were to divest these shares eventually?



Facts

► 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

100%

N Co

I Co

Netherlands

India

100%

UK Co United Kingdom

Outside India

Inside India



► 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 had 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)

100%

N Co

I Co

Netherlands

India

100%


Outside India

Inside India



► 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 on 1 July 2013 of 10

100%

N Co

I Co

Netherlands

India

100%


Outside India

Inside India



Issues for consideration

► What could be the Income-tax implications in the hands of N Co/ I Co/ UK Co in respect of interest payout by I Co?

► Whether GAAR could be invoked in respect of past transactions of CCDs and ECBs?

► On what grounds could the tax authorities invoke GAAR in respect of CCDs as well as ECBs inspite interest payout being at arm’s length?

► In whose hands can GAAR be invoked in respect of CCDs and ECBs?

► What could be the consequences/ Income-tax implications in the hands of N Co/ I Co/ UK Co in case GAAR is invoked by the tax authorities?


Case study 6 – SAAR/LOB v/s GAAR

Facts

► 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


Case study 6 – SAAR/ LOB v/s GAAR

► 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

US Co

M Co

Mauritius

USA

I Co

100%

100%

S Hold Co

100%

India

SingaporeSale of I Co shares

100%

S Op Co

Outside India

Inside India



► S Hold Co and S Op Co are tax residents of Singapore, holding tax residency certificates 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

US Co

M Co

Mauritius

USA

I Co

100%

100%

S Hold Co

100%

India

SingaporeSale of I Co shares

100%

S Op Co

Outside India

Inside India




► Whether US Co or M Co or S Hold Co could be subject to Income-tax in India on gains from sale of shares of I Co?

► On what grounds could the tax authorities invoke GAAR to assert taxability on US Co or M Co or S Hold Co for gains from sale of shares of I Co?

► What would be the cost of acquisition for the transferor in respect of the transaction of sale of shares in FY 2014-15?

► Can the intra-group reorganization of December 2012 and subsequent sale of shares in FY 2014-15 be considered as “pre-ordained” and subject to GAAR?

► Can the tax authorities invoke GAAR in the above case, even though S Hold Co meets the “limitation of benefit” test under the India-Singapore tax treaty?

► What could be the consequences/Income-tax implications in the hands of US Co/M Co/S Hold Co in case GAAR is invoked by the tax authorities?

Thank youThis presentation contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither Ernst & Young Pvt. Ltd. nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

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