www.pwc.in

Evolving and Dynamic tax and regulatory
scenario in India
Ketan Dalal, Sandeep Chaufla and Prerna
Mehndiratta
...
Presentation structure
Macro economic and tax environment
Doing business in India

Transfer pricing
Mergers and Acquisitio...
Macro economic and tax environment

Evolving tax and regulatory scenario in India
PwC

November 2013
Slide 3
Economic environment
GDP Growth
CY 2013

CY 2014

3.8%

China

India

5.1%

4.5%

Emerging and
developing economies

Advan...
Tax environment – the big picture
• MNCs high on radar
− Higher visibility and scrutiny of cross border transactions
− Wit...
Legislative GAAR deferred
• Implementation deferred by two years; though judicial GAAR exists even today!
• Applies to tax...
Companies Act, 2013
• Several sections notified - expected to be fully notified by March 2014
• Key highlights
- Related p...
LLPs vs. Companies
• Permitted in India since April, 2009
About LLPs • Much less onerous compliances compared to requireme...
Conversion to LLPs

Who can convert

Is conversion tax-free?

• Only firms, private and unlisted companies

• Exemption fo...
Key regulatory changes
Relaxation of ECB norms

• Definition of infrastructure
widened
• Revision in maximum limits
• Perm...
Outlook on Tax Treaties
• TRC required as evidence of residential status to qualify for treaty benefit

- Specified partic...
Doing business in India

Evolving tax and regulatory scenario in India
PwC

November 2013
Slide 12
Overview of Tax Rates
subject to tax treaties
S. No.

Particulars

Rates *(%)

1

Domestic company

33.99

2

Foreign comp...
Tax holidays and incentives
Tax holiday/ incentive

Period of exemption

Power generation

• 100% of profits and gains
• 1...
PE risk assessment
Technical Threshold / Taxpayer Focus

• PE challenges on the increase

• Tax due, penalties and interes...
Adhoc attribution/ recent judicial trends
• Adhoc attribution by the Revenue
Some judicial analysis on profit attribution
...
Engineering, procurement, construction contracts
• Typical scopes of work:
- Offshore supply, offshore services
- Offshore...
India inbound expat assignment structures
• Varying degrees of PE exposure: Morgan Stanley, Verizon
• Typical models:
- Le...
India-France treaty – certain special dimensions
• PE clause
- No reference to supervision activity; hence slightly narrow...
Dispute resolution - overview
• Strategy for dispute resolution critic – proactive, not reactive

• Some dimensions:
- Alt...
High profile litigations: indirect transfers/ equity
infusion
Vodafone
Indirect transfer sought
to be subjected to WHT

Sh...
Indirect transfers: uncertainty continues
• Term ‘substantially’ not defined

• Term ‘substantial’ is defined in the Oxfor...
Transfer pricing

Evolving tax and regulatory scenario in India
PwC

November 2013
Slide 23
The landscape
• Greater focus on intercompany payments/ service arrangement
• High on agenda - royalty payouts, management...
Transfer Pricing Audit Environment in India

Policy
Environment

Legal
Environment

Practical
Challenges

• Focus on estab...
India – Safe Harbour Rules
• Effective from FY 2012-13 and subsequent 4 years.

• Rates prescribed are tabulated below:
El...
India – APA scenario

Types of APA

• Unilateral, bilateral and multilateral APAs allowed
• Allows flexibility during the ...
Mergers and acquisitions

Evolving tax and regulatory scenario in India
PwC

November 2013
Slide 28
Acquisition financing
Funding
options

Equity
• No end use
restrictions
• 75% limit in List
Co
• Dividend
distribution tax...
Entry Strategies...
Direct Route vs Intermediary Holding Company
IHCo Route

Direct Route

F Co

F Co

1. Singapore
(LOB c...
Indirect taxes

Evolving tax and regulatory scenario in India
PwC

November 2013
Slide 31
Indirect Tax Structure in India – An Overview
Central Levy

Customs
Duty

State Levy

Service
Tax

Excise Duty

Entry tax/...
Key take-aways

Evolving tax and regulatory scenario in India
PwC

November 2013
Slide 33
Key take-aways
Three steps forward – Two steps backward
Net movement – forward!
• Several changes including DTC on the anv...
Glossary
Abbreviations
AAR

Authority for Advance Rulings

AMT

Alternate Minimum Tax

AoP

Association of Persons

APA

A...
Glossary
Abbreviations
GDP

Gross Domestic Product

GST

Goods and Service Tax

IHC

Intermediary Holding Company

INR

In...
Glossary
Abbreviations
SEZ

Special Economic Zone

TP

Transfer Pricing

TRC

Tax Residency Certificate

VAT

Value Added ...
Thank You
Ketan Dalal
Joint Tax Leader
PwC India
Email : ketan.dalal@in.pwc.com
Tele : +91 22 6689 1422
Cell : +91 98200 3...
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Etude PwC Réussir vos investissements en Inde (2013)

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Au cours des six derniers mois, le gouvernement indien a multiplié les initiatives pour relancer la croissance. Par ailleurs plusieurs développements juridiques et fiscaux sont susceptibles d'affecter les investissements en Inde des entreprises françaises.

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Etude PwC Réussir vos investissements en Inde (2013)

  1. 1. www.pwc.in Evolving and Dynamic tax and regulatory scenario in India Ketan Dalal, Sandeep Chaufla and Prerna Mehndiratta Paris, 28 November 2013
  2. 2. Presentation structure Macro economic and tax environment Doing business in India Transfer pricing Mergers and Acquisitions Indirect taxes Key take-aways Evolving tax and regulatory scenario in India PwC November 2013 Slide 2
  3. 3. Macro economic and tax environment Evolving tax and regulatory scenario in India PwC November 2013 Slide 3
  4. 4. Economic environment GDP Growth CY 2013 CY 2014 3.8% China India 5.1% 4.5% Emerging and developing economies Advanced economies Goldman Sachs upgraded India's rating Foreign exchange volatility; attaining stability now Inflation to average around 6% • Populist measures as country approaches the general elections 5.1% 1.2 % • • 7.2% Economy slowed down in CY 13; picking up pace again • 7.6% • 2.0 % Source: World Economic Outlook , The IMF Evolving tax and regulatory scenario in India PwC November 2013 Slide 4
  5. 5. Tax environment – the big picture • MNCs high on radar − Higher visibility and scrutiny of cross border transactions − Withholding tax defaults closely audited; prosecution proceedings − Cyprus notified as a non-co-operative jurisdiction • Yet, several moves towards a responsive and less adversarial tax regime − Soul searching on retrospective amendments − GAAR : legislative provisions deferred − Tax Administrative Reforms Commission set up − DTC expected to simplify tax regime − Safe harbour rules introduced − APAs : pragmatic approach, initial response encouraging Evolving tax and regulatory scenario in India PwC November 2013 Slide 5
  6. 6. Legislative GAAR deferred • Implementation deferred by two years; though judicial GAAR exists even today! • Applies to tax benefit obtained on/after April 1, 2015 from arrangements entered on any date. Overrides tax treaty. • Rules notified in Sept-GAAR inter-alia not to apply : - if tax benefit less than INR 30 mn (Euro 350,000) - on investments made before 30 August 2010 • GAAR Approving Panel to include independent members • Commercial rationale is key safeguard against GAAR • Advance ruling allowed for both residents and non-residents Evolving tax and regulatory scenario in India PwC November 2013 Slide 6
  7. 7. Companies Act, 2013 • Several sections notified - expected to be fully notified by March 2014 • Key highlights - Related party transactions ring-fenced - Stricter regime for private companies - Auditors rotation - FY: 31 March - Inter corporate loans/ investments restricted - Duties and liabilities of Directors/ KMP widened - Restriction on layers of investment companies - Fast track mergers - Cross border mergers concept introduced Evolving tax and regulatory scenario in India PwC November 2013 Slide 7
  8. 8. LLPs vs. Companies • Permitted in India since April, 2009 About LLPs • Much less onerous compliances compared to requirements under Companies Act LLPs and FDI LLPs and Tax • FDI in LLPs allowed with approval from FIPB in sectors where 100% FDI is allowed through Automatic route (see next slide) • LLPs with FDI cannot make downstream investment/ raise foreign currency loans • No Dividend Distribution Tax • Less onerous AMT applies, not MAT that applies to Companies • More flexibility in structuring LLP agreement AMT applies to taxable income as adjusted by specified deductions; not to book profits Evolving tax and regulatory position in India PwC AMT does not apply to tax-exempt longterm capital gains November 2013 Slide 8
  9. 9. Conversion to LLPs Who can convert Is conversion tax-free? • Only firms, private and unlisted companies • Exemption for very small companies converting • However, there are potential conversion options with limited tax exposure Merger/ Demerger into Newco followed by conversion Graded migration Transfer business to LLP at Book Value Evolving tax and regulatory position in India PwC November 2013 Slide 9
  10. 10. Key regulatory changes Relaxation of ECB norms • Definition of infrastructure widened • Revision in maximum limits • Permitted for general Liberalisation of SEZ framework • Lower minimum land area FDI/ ODI • Overseas investment limits requirement for multi- for Indian Companies product & sector-specific SEZ reduced from 400% to • No minimum area corporate purpose under requirement for IT /ITeS approval route (minimum 100% of net worth • Graded scale for minimum average maturity of 7 years) land area criteria, sector broad-banding, land vacancy issues & exit policy for SEZ units Evolving tax and regulatory scenario in India PwC November 2013 Slide 10
  11. 11. Outlook on Tax Treaties • TRC required as evidence of residential status to qualify for treaty benefit - Specified particulars to be furnished to the IRA if not provided in the TRC - Judiciary consistently upholding eligibility for treaty relief basis TRCs • Mauritius treaty - has prescribed conditions for creation of “substance” – effective January 1, 2015 - renegotiation of treaty expected – LoB likely to be introduced • Revenue remains aggressive in its stand– substance over form applied • Some unilateral steps by India to override treaty benefits Evolving tax and regulatory scenario in India PwC November 2013 Slide 11
  12. 12. Doing business in India Evolving tax and regulatory scenario in India PwC November 2013 Slide 12
  13. 13. Overview of Tax Rates subject to tax treaties S. No. Particulars Rates *(%) 1 Domestic company 33.99 2 Foreign company-branch, project /other PE 43.26 3 MAT 20.961 4 DDT 16.995 5 BBT 22.66 * Including all surcharges and cesses; highest slab rates Buyback Tax • Shareholders are exempt (tax borne by company buying back shares) • Not linked to availability of accumulated profits • Distributed income = consideration paid less amount received on issue • Credit of BBT in home country may not be available Evolving tax and regulatory position in India PwC November 2013 Slide 13
  14. 14. Tax holidays and incentives Tax holiday/ incentive Period of exemption Power generation • 100% of profits and gains • 10 years in a block of 15 years • Sunset –commence operations March 31, 2014 SEZ • 100% of export profits - 5 years • 50% of export profits - 5 years • 50% of export profits, subject to transfer to reserves- 5 years • DTC expected to introduce sunset clause • Exemption from MAT withdrawn In – house research 200% deduction - extended till 31st March, 2017 Approval from competent authority required Evolving tax and regulatory scenario in India PwC November 2013 Slide 14
  15. 15. PE risk assessment Technical Threshold / Taxpayer Focus • PE challenges on the increase • Tax due, penalties and interest • Filing requirements • Prior years scenario • Knock-on impact for other taxes (Payroll, VAT / service tax) • Knock-on effect for the same type of tax (withholding tax, creditable taxes, etc) Service PE Fixed place of business PE PE rule Evolving tax and regulatory scenario in India PwC Agency PE PE strategy critical; address the quantum! November 2013 Slide 15
  16. 16. Adhoc attribution/ recent judicial trends • Adhoc attribution by the Revenue Some judicial analysis on profit attribution Particulars Profit Attribution Taxability of offshore supplies where PE performed certain activities 20% of proportionate profits based on global profits Taxability of offshore supplies where PE performed marketing activities 35% of profit (50% manufacturing, 15% R&D) Evolving tax and regulatory scenario in India PwC November 2013 Slide 16
  17. 17. Engineering, procurement, construction contracts • Typical scopes of work: - Offshore supply, offshore services - Offshore supply, onshore services • Typical challenges: - Consortium contract – AOP exposure - Project office of the Foreign Co for onshore scope - Constitution of PE of foreign company; taxability of offshore supplies • Safeguards: - Bidding documents to reflect the contractual understanding - Separate contracts for distinct scopes of work, remuneration - Coordination agreement - AAR for predetermination of tax liability? Evolving tax and regulatory scenario in India PwC November 2013 Slide 17
  18. 18. India inbound expat assignment structures • Varying degrees of PE exposure: Morgan Stanley, Verizon • Typical models: - Legal employment in India - Dual employment - Secondment - Manpower supply arrangements • Foreign Exchange - Restrictions on payment of salary in bank account outside India • Tax issues on reimbursement of salary cost • Social security contributions in India • Service tax on cross charges Documentation is key Evolving tax and regulatory scenario in India PwC November 2013 Slide 18
  19. 19. India-France treaty – certain special dimensions • PE clause - No reference to supervision activity; hence slightly narrow in EPC context. - Vis-à-vis agency PE, reference to ‘concludes contracts’ not extended to ‘secures orders’. - Attribution of profits to PE- restricted/ clarified by protocol to the treaty • MFN clause FTS/ royalty; restricts scope or rate – India-Portugal/ India-Finland tax treaties • Royalties includes equipment trigger; withholding rate is 10% on gross for all royalties • Capital gains (other than on items specifically covered) taxable only in country of residence • Loans endorsed/ extended by COFACE exempt • Bilateral APA in absence of sub clause (2) in Associated Enterprise article? Evolving tax and regulatory scenario in India PwC November 2013 Slide 19
  20. 20. Dispute resolution - overview • Strategy for dispute resolution critic – proactive, not reactive • Some dimensions: - Alternative forums for dispute resolution - Prevention better than cure (AARs/ APAs) - Recurring vs one time - Payment of demand Evolving tax and regulatory scenario in India PwC November 2013 Slide 20
  21. 21. High profile litigations: indirect transfers/ equity infusion Vodafone Indirect transfer sought to be subjected to WHT Shell F Co 1 Capital infused into Indian 100% sub Sale Supreme Court decision favourable F Co 2 Capital Infusion arguably “undervalued” “Undervaluation" sought to be taxed as income! Retrospective amendment –has been challenged I Co No action to collect tax Expert Committee to review law Committee has criticised retro amendment Relief for Indirect transfers Evolving tax and regulatory position in India PwC November 2013 Slide 21
  22. 22. Indirect transfers: uncertainty continues • Term ‘substantially’ not defined • Term ‘substantial’ is defined in the Oxford Dictionary to mean ‘of considerable importance, size, or worth’ • Issue arises as to whether substantial is : - 26% - 51% - ~100% • No legislative clarity at present • No exemption on intra- group transactions / restructurings • No minimum threshold specified • Timing of clarity could be impacted by Vodafone “settlement” Evolving tax and regulatory scenario in India PwC November 2013 Slide 22
  23. 23. Transfer pricing Evolving tax and regulatory scenario in India PwC November 2013 Slide 23
  24. 24. The landscape • Greater focus on intercompany payments/ service arrangement • High on agenda - royalty payouts, management charges closely audited • Intangibles is a key area of focus: − Profits from intangibles should not be divorced from value creation − Special measures for transfer of hard-to-value intangibles • Robust documentation required to demonstrate: − Benefit received − Arm’s length price Evolving tax and regulatory scenario in India PwC November 2013 Slide 24
  25. 25. Transfer Pricing Audit Environment in India Policy Environment Legal Environment Practical Challenges • Focus on establishment of a non-adversarial tax regime • APAs gathering momentum - 146 applications filed • TP adjustments in excess of US$ 28 billion over 8 audit cycles • Rangachary committee for recommendations on safe harbours • Norms for development centers to qualify as contract R&D centers • TP adjustments worth US$ 12 billion in FY 08-09 • Shome committee for tax reforms • Safe harbor regime for IT, ITeS, R&D services • More than 3,200 cases audited - Adjustments in over 50% of cases • Balanced approach of the Tribunal Evolving tax and regulatory scenario in India PwC • High adjustments for IT, BPO & KPO November 2013 Slide 25
  26. 26. India – Safe Harbour Rules • Effective from FY 2012-13 and subsequent 4 years. • Rates prescribed are tabulated below: Eligible International transaction Provision of ITes Rate for international transaction Rate subject to Limits Turnover <= INR 5 bn (Euro 58.9 Mn) 22% Evolving tax and regulatory position in India PwC 20% Turnover > INR 5 bn (Euro 58.9 Mn) November 2013 Slide 26
  27. 27. India – APA scenario Types of APA • Unilateral, bilateral and multilateral APAs allowed • Allows flexibility during the process Term • Up to five years • Roll-back not specifically provided for APA team • Besides revenue officials, the APA team to include experts in economics, statistics, law, etc. Evolving tax and regulatory position in India PwC November 2013 Slide 27
  28. 28. Mergers and acquisitions Evolving tax and regulatory scenario in India PwC November 2013 Slide 28
  29. 29. Acquisition financing Funding options Equity • No end use restrictions • 75% limit in List Co • Dividend distribution tax (DDT) @ 17% ECB • End use restrictions for downstream acquisitions • Allowed for working capital (approval route) • Avg. maturity-5 years • Coupon restrictions • Withholding tax @ 5.41% (limited window) • Lender’s equity holding > 25% , debt/ equity - 4:1 Evolving tax and regulatory scenario in India PwC FCDs • Treated as FDI • No end use restrictions • Conversion terms upfront • To be converted on listing • WHT – 10/15% • No interest deduction for share acquisitions Listed NCBs • End use - downstream permitted • Eligible lenders – FIIs/ QFIs • Coupon restrictions: Redeemable ~ 14.5% • WHT - 5.41% − Interest upto May 31, 2015 − Else 10/15% • No interest deduction for share acquisitions November 2013 Slide 29
  30. 30. Entry Strategies... Direct Route vs Intermediary Holding Company IHCo Route Direct Route F Co F Co 1. Singapore (LOB clause) France O/S India IHCo I Co Identified tax efficient jurisdictions considered for IHCo based on India tax treaties: India I Co 2. Mauritius (no substance required? – only TRC) 3. Netherlands (Transfer from non-resident to nonresident - capital gains are exempt) Prudent to have substance at IHCo level Evolving tax and regulatory position in India PwC November 2013 Slide 30
  31. 31. Indirect taxes Evolving tax and regulatory scenario in India PwC November 2013 Slide 31
  32. 32. Indirect Tax Structure in India – An Overview Central Levy Customs Duty State Levy Service Tax Excise Duty Entry tax/ Octroi CST VAT Co-existence of federal and state taxes – dual VAT Dual GST expected in next 3 years PwC September 2013 Slide 32
  33. 33. Key take-aways Evolving tax and regulatory scenario in India PwC November 2013 Slide 33
  34. 34. Key take-aways Three steps forward – Two steps backward Net movement – forward! • Several changes including DTC on the anvil • Litigious environment with continuing revenue department’s aggression, and consequent role of judiciary • Safe harbour rules, APA, etc are recognition of need to address tax concerns • Approach towards disputes - Cautious ... and yet, guard against action paralysis - Dispute prevention strategy crucial (Advance Rulings, APA etc), especially given delays in resolution • Indirect transfer provisions to remain a challenge – resolution only after 2014 • Regulatory scenario to remain dynamic –spill-over tax impact Evolving tax and regulatory scenario in India PwC November 2013 Slide 34
  35. 35. Glossary Abbreviations AAR Authority for Advance Rulings AMT Alternate Minimum Tax AoP Association of Persons APA Advance Pricing Arrangements BBT Buy-back Tax BPO Business Process Outsourcing COFACE Compagnie Française d'Assurance pour le Commerce Extérieur CST Central Sales Tax CY Current year DDT Dividend Distribution Tax DTC Direct Tax Code ECB External Commercial Borrowings EPC Engineering, procurement and construction FCD Fully Convertible Debentures FDI Foreign Direct Investment FII Foreign Institutional Investor FIPB Foreign Investment Promotion Board FTS Fees for Technical Services FY Financial year GAAR General Anti-Abuse Rules Evolving tax and regulatory scenario in India PwC November 2013 Slide 35
  36. 36. Glossary Abbreviations GDP Gross Domestic Product GST Goods and Service Tax IHC Intermediary Holding Company INR Indian Rupee IRA Indian Revenue Authorities IT Information Technology ITes Information Technology Enabled Services KMP Key Managerial Personnel KPO Knowledge Process Outsourcing LLP Limited Liability Partnership LoB Limitation of benefits MAT Mimimum Alternate Tax MFN Most Favoured Nation mn Million MNC Multi National Company NCB Non Convertible Bonds ODI Outbound Direct Investment PE Permanent Establishment QFI Qualified Foreign Investor R&D Research and Development Evolving tax and regulatory scenario in India PwC November 2013 Slide 36
  37. 37. Glossary Abbreviations SEZ Special Economic Zone TP Transfer Pricing TRC Tax Residency Certificate VAT Value Added Tax WHT Withholding Tax Evolving tax and regulatory scenario in India PwC November 2013 Slide 37
  38. 38. Thank You Ketan Dalal Joint Tax Leader PwC India Email : ketan.dalal@in.pwc.com Tele : +91 22 6689 1422 Cell : +91 98200 39516 Sandeep Chaufla Executive Director – Direct Tax Practice PwC India Email : sandeep.chaufla@in.pwc.com Tele: +91 124 3306001 Cell : +91 98100 29154 Renaud Jouffroy Attorney at law, Partner – Hauts-de-Seine Bar Landwell & Associés, société d’avocats Member of the PwC international network Email: renaud.jouffroy@fr.landwellglobal.com Tele: +33 (0)1 56 57 42 29 Cell: +33 (0)6 81 95 12 55 www.landwell.fr Prerna Mehndiratta Associate Director – M&A Practice PwC India Email : prerna.mehndiratta@in.pwc.com Tele: +91 124 3306024 Cell : +91 98731 55480 © 2013 PricewaterhouseCoopers Private Ltd. All rights reserved. “PwC”, a registered trademark, refers to PricewaterhouseCoopers Private Limited (a limited company in India) or, as the context requires, other member firms of PwC International Limited, each of which is a separate and independent legal entity.

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