1 THE CHAMBER OF TAX CONSULTANTS 10 TH RESIDENTIAL REFRESHER CONFERENCE ON INTERNATIONAL TAXATION CASE STUDIES ON INTERNATIONAL TAXATION PRESENTED BY SUNIL MOTI LALA Advocate & Tax Counsel SML tax chamber www.smltaxchamber.com
Case Studies on International Taxation 2 Case Studies I. Amendment to India - Mauritius Treaty, overseas liquidation and General Anti Avoidance Rule (‘GAAR’) II. Service PE, Installation PE and Fees for Included Services III. Application of section 56(2)(viia) of the Income-tax Act, 1961 (‘the Act’) vis-à-vis cross border transfer of shares
Case Studies on International Taxation 3 1. Please note that the facts of the case study are such that for most of the issues, prima-facie, the language of the Income-tax Act, 1961 or the relevant Double Tax Avoidance Agreements is against the assessee. The objective of this Presentation is to try and find out some favourable answers or give some hope / arguments for favourable outcomes. The answers are predominantly favourable, however the same cannot be considered as absolute since contrary views are possible. 2. Kindly do not give any advice or do any tax planning based on the matter contained in this presentation. 3. However, the matter in the presentation may be helpful during assessment and appeals and may be used solely at your risk and consequences.
Amendment to Mauritius Treaty, overseas liquidation and GAAR 4 ABC Inc (USA) Facts 100% Option B – Step 2 – Transfer of Option B – shares of PQR Step 1- 1. ABC Inc, one of the world’s leading B2B e-commerce conglomerate, holds a to S Pte Ltd N BV Liquidation 100% stake in N BV which in turn holds a) a 100 percent stake in PQR Pvt Ltd (Netherlands) (‘PQR’) through its subsidiary - M Co (Mauritius) b) a 100 percent stake in another Indian company viz. LMN Pvt Ltd, through its subsidiary company incorporated in Singapore – S Pte Ltd. 100% 100% S Pte Ltd M Co 2. M Co is a private limited company incorporated under the laws of Mauritius. It (Singapore) (Mauritius) incurs an annual expenditure of MUR 20 Lakhs. It acquired 100 percent of the equity shares of PQR Pvt Ltd (for a consideration of Rs.20 crores) in May 2005 and subsequently subscribed to 1,00,000 Compulsorily Convertible Option A - Transfer of Debentures (‘CCD’s’) in PQR Ltd on April 30, 2016 which are convertible into shares of 1,00,000 equity shares of PQR Ltd on April 30, 2017. The fair market value of PQR Ltd Outside India investments in PQR Ltd which constituted 52 percent of the total value of India assets of M Co. was Rs.80 crores as on 31.03,2018. 1,00,000 100% 100% Compulsoril 3. With a view to reduce the complexity of the group structure, increase equity equity y shares shares efficiency and reduce the number of companies, the Group wishes to transfer Convertible Debentures its operations in India to S Pte Ltd by the end of March 2018 and is LMN Pvt Ltd PQR Pvt Ltd in PQR Ltd (India) (India) contemplating the following options:
Amendment to Mauritius Treaty, overseas liquidation and GAAR 5 ABC Inc (USA) Facts 100% Option B – Step 2 – Transfer of shares of Option B – Step 1- PQR to S Pte Ltd Option A Liquidation N BV (Netherlands) • M Co, Mauritius transfers its shareholding in PQR Pvt Ltd (equity shares + converted equity shares) to S Pte Ltd, Singapore in March 2018 thereby transferring control over all Indian operations to S Pte Ltd, Singapore; and 100% 100% • M Co. goes into liquidation. S Pte Ltd M Co (Singapore) (Mauritius) Option B • M Co is to liquidate, ultimately transferring all its assets including equity shares in PQR Ltd to N BV, Netherlands; Option A - Transfer of and shares of PQR Ltd Outside India • N BV, Netherlands to transfer the shares held in PQR Ltd, India post liquidation, to S Pte Ltd thereby transferring control over all Indian operations to S Pte Ltd, Singapore. 1,00,000 100% 100% equity Compulsorily equity shares Convertible shares Debentures in PQR Ltd LMN Pvt Ltd PQR Pvt Ltd (India) (India)
Amendment to Mauritius Treaty, overseas liquidation and GAAR 6 Queries Option A 1. What are the income-tax implications in the hands of M Co as a result of such transfer of equity shares of PQR Ltd to S Pte Ltd? 2. Would it make any difference, if instead of holding CCDs, M Co held Compulsorily Convertible Preference Shares in PQR Ltd? 3. Would the tax authorities be able to invoke General Anti-avoidance Rule (‘GAAR’) of the Income-tax Act, 1961 (‘the Act’) to deny the benefit, if any under the India – Mauritius DTAA? Option B 1. What are the income-tax implications of the proposed liquidation in the hands of M Co and N BV? 2. What are the income-tax implications in the hands of N BV consequent to the sale of shares held by N BV in PQR Ltd to S Pte Ltd, post liquidation? 3. Would the tax authorities be able to invoke GAAR on the ground that: • the assessee would be taxable in India on sale of converted shares as per the India-Mauritius Treaty • the main object of the liquidation and subsequent sale was to obtain tax benefit under the India-Netherlands treaty and consequently the entire transaction was an impermissible avoidance arrangement under section 96(1)(b) of the Act.
Amendment to Mauritius Treaty, overseas liquidation and GAAR 7 Queries - Option A - Income-tax implications in the hands of M Co as a result of transfer of equity shares of PQR Ltd to S Pte Ltd? Under the Income-tax Act, 1961 M Co - Capital Gains Tax - (Section 45, Section 47(x) read with Rule 8AA and 48 and Section 112 of the Act) Under the India- Mauritius DTAA – Section 90(2) • 13(4) - “Gains derived by a resident of a Contracting State from the alienation of any property other than those mentioned in paragraphs (1), (2) and (3 ) of this article shall be taxable only in that State.” 13(5) – “ For the purposes of this article, the term "alienation" means the sale, exchange, transfer, or relinquishment of the property or the extinguishment of any rights therein or the compulsory acquisition thereof under any law in force in the respective Contracting States.” Income-tax implications of the transfer of shares (originally held as well as converted) prior to the Protocol : • Gain on sale of (i) original shares and (ii) shares converted (from CCDs) – taxable only in Mauritius
Amendment to Mauritius Treaty, overseas liquidation and GAAR 8 Queries - Option A - Income-tax implications in the hands of M Co as a result of transfer of equity shares of PQR Ltd to S Pte Ltd? Text of the Protocol amending the India-Mauritius DTAA: Article 13 (Capital Gains) of the Convention shall be amended with effect from 1.4.2017, by : i. inserting - new paragraphs 3A and 3B as follows: “3A. Gains from the alienation of shares acquired on or after 1st April 2017 in a company which is resident of a Contracting State may be taxed in that State. 3B. However, the tax rate on the gains referred to in paragraph 3A of this Article and arising during the period beginning on 1st April, 2017 and ending on 31st March, 2019 shall not exceed 50% of the tax rate applicable on such gains in the State of residence of the company whose shares are being alienated”; and ii. replacing the existing paragraph 4 with the following: “4. Gains from the alienation of any property other than that referred to in paragraphs 1, 2, 3 and 3A shall be taxable only in the Contracting State of which the alienator is a resident.”
Amendment to Mauritius Treaty, overseas liquidation and GAAR 9 Queries - Option A - Income-tax implications in the hands of M Co as a result of transfer of equity shares of PQR Ltd to S Pte Ltd? Income-tax implications of the transfer of shares (originally held as well as converted) post the Protocol : Particulars Literal Interpretation Considering the object of Grandfathering provisions Shares acquired in May Taxable only in Mauritius Taxable only in Mauritius under Article 13(4) 2005 i.e. originally held under Article 13(4) 1,00,000 Shares converted Taxable in India under • Grandfathering provisions acquired on April 30, 2017 Article 13(3A) and 13(3B) @ A grandfathering provision is defined as “a provision that creates an (i.e. post April 1, 2017) , 50 percent of the domestic exemption from the law’s effect for something that existed before the pursuant to conversion of rates law’s executive date. A statutory of regulatory clause that exempts a CCDs acquired pre April 1, class of persons or transactions because of circumstances existing before 2017 the new rule of regulation takes place” – Black’s Law Dictionary In the given case, one may argue that the amendment in the Protocol applies, not only to shares acquired prior to April 1, 2017 but also to an act of acquisition of shares (purchase of CCDs) prior to April 1, 2017 undertaken prior to April 1, 2017 and therefore the shares would be deemed to be acquired on the date of acquisition of CCDs i.e. April 30, 2016
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