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GAAR PROVISIONS
GAAR A SNAPSHOT
Effective April 1, 2013 (ie for transactions pertaining to tax year 2013-14) Doctrine of substance over form codified to deter tax avoidance No carve out for genuine tax planning Trigger for GAAR - main purpose or one of the main purpose is to obtain tax benefit
Authority of Advance Rulings (AAR) may be approached for determining applicability of GAAR Onus to prove that transaction meant to obtain a tax benefit on the Indian Revenue Authorities (IRA) GAAR panel to approve the application of GAAR If GAAR invoked, Revenue empowered inter-alia to:
disregard or combine any step in the arrangement look through the arrangement by disregarding the corporate structure re-allocate income/ expense, re-characterize equity into debt or debt into equity treat the place of residence of any party or situs of an asset or transaction other than place or location mentioned in the arrangement
All rights reserved | Preliminary & Tentative
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Unilateral payment of tax not exactly a safe harbor! Constitutionality of safe harbor requiring outright payment of tax in lieu of non- application of GAAR could be questioned No special treatment for FIIs No clarity on level of substance required to be established by FIIs / PE Funds and if the level would be the same as in case of other holding/operating companies? More clarity could be expected in the coming months
All rights reserved | Preliminary & Tentative
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Impact on business re-organisations Merger of two companies with carry forward of loss not subject to GAAR if specific conditions for merger satisfied Buy back of shares subject to taxation under GAAR - inconsistent with principles laid down under the domestic tax law
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Therefore, existing and future US investments to be within the GAAR purview Mauritius looking to negotiate grandfathering of the existing investments?
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KEY TAKEAWAYS
Negatives No grandfathering for existing investments under GAAR Assumedly low monetary threshold for non-application of GAAR Reference procedure for application to the GAAR Panel reads as if the onus to prove still on the taxpayer Examples in the Draft Guidelines unclear No granular substance requirements provided Basic treaty benefits sought to be covered within the GAAR ambit
All rights reserved | Preliminary & Tentative
Illustrations are not sophisticated but amateurish GAAR to override the international tax treaties (no unequivocal statement in respect of bi-lateral tax treaties made by the Government) Repatriation of profits by buy back of shares instead of distribution of dividend subject to GAAR
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KEY TAKEAWAYS
Positives Reference to tax mitigation made for the first time to be kept outside the GAAR purview Clarity on LoB clause in the Singapore tax treaty and the kind of expenses which will not be considered in calculating the threshold limit (eg interest on loan from shareholder) Declaration of dividend stated to be a business choice GAAR held not to substitute SAARs Similarly, in the absence of anti-deferral provisions (ie CFC provisions), GAAR not to be applied
All rights reserved | Preliminary & Tentative
Choice of raising equity vs debt, again stated as a business choice In the absence of thin capitalization rules, GAAR cannot be invoked (however, Transfer Pricing shall apply on interest payments to related parties) Merger of loss making entity into profit making entity outside GAAR owing to existence of SAARs in the statute
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CONCLUSION
Sale of shares of Mauritius / Singapore company taxable as indirect transfer under the domestic tax law expectation of a clarificatory circular on the same Documentation for each step in a transaction / structure stating the intent of the parties to be clearly captured Need for supplement documentation with expert reports, legal opinions etc Need to bring out substance as much as possible to mitigate the GAAR exposure Preparedness for GAAR to begin now
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Please refer the following links for BMR papers on GAAR GAAR impact on cross-border structuring SAAR to GAAR Impact on domestic structures and transactions Business Standard: A reform approach to the policy debate
All rights reserved | Preliminary & Tentative
Business World: A Strong Case for GAAR Financial Express: Draft GAAR guidelines step in right direction?
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Mukesh Butani
Mukesh is Chairman, an Of counsel to the firm and Managing Partner of BMR Legal. With a specialisation in international tax and transfer pricing, he has over 25 years experience in advising Fortune 500 multinationals and Indian business houses on a wide range of matters relating to cross-border tax structuring, tax controversy and tax policy. A former national tax Director and international tax Partner at two Big Four firms, Mukesh currently serves as a member of the board of Taxand, the worlds largest independent tax organisation, and as Vice Chairman of the International Chamber of Commerce Commission on Taxation. He was recently inducted as member of the Advisory Group on International Tax and Transfer Pricing constituted by the Indian Ministry of Finance. He is also a member of the OECD Business Restructuring Advisory Group. Mukesh is an acclaimed expert on international tax and transfer pricing and has a number of authorships to his credit including works published by LexisNexis Butterworths and most recently, a treatise on Dispute Resolution for the Cambridge University Press. His other authorships include the Wolters Kluwer CCH online guide to Transfer Pricing in Asia and titles on Business Restructurings and Customs Valuation, coauthored for the International Bureau of Fiscal Documentation (IBFD). Mukesh participated in the Kelkar task force tax reforms and was a member of the Indian Governments committee on e-commerce taxation. He is presently representing ICC in the Standing Committee on withholding tax. Mukesh has consistently featured among the leading international tax and transfer pricing advisors in independent surveys, most notably the International Tax Review, Legal Media expert guide, Asia Law Leading Lawyers, Chambers & Partners and Legal Whos Who of Corporate Tax Lawyers.
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Gokul Chaudhri
Gokul is a tax Partner with BMR Advisors, leading the direct tax practice of the firm. He has over 20 years experience in tax matters with a focus on the energy sector. Prior to joining BMR Advisors at its founding in November 04, Gokul was the leader of the Energy, Chemicals and Mining industry and member of the Oil & Gas industry team at a Big 4 firm. His professional service experience includes significant engagements for domestic and international clients, including multi-billion dollar cross border transactions, privatization initiatives and project advisory for large infrastructure assets. In addition, he has extensive experience in structuring and presenting (possibly over 400 in number) in-bound foreign investment proposals to the Government of India. In the early years of the liberalization in India, he was the joint leader for the engagement commissioned by the Ministry of Industry and Commerce for benchmarking concerns and challenges faced by foreign investors in India. Over the past decade, Gokul has been an active speaker at domestic and international seminars. He is a member of the Institute of Petroleum (now The Energy Institute, London) and Federation of Indian Mineral Industries. He is the Chairman of the Energy committee of PHD Chambers of Commerce and Industry . He has been a participant and speaker at the investment road shows held in Europe by the Government of India and was also invited in 2006 by the business forum of the European Commission to speak at Brussels on the reform process in India. Gokul has been involved in fiscal reform initiatives by the Government of India, and was a member of the task force on tax reforms for the mining industry. He is currently a member of the executive council of International Fiscal Association North India. He also served as a member of the finance sub group for road map for Clean Development Mechanism under the National Action Plan for Climate Change, and technical group for guidance on accounting of carbon credits constituted by the Institute of Chartered Accountants of India. Gokul is a graduate in Commerce from the University of Mumbai and qualified as a Chartered Accountant in 1994.
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Shefali Goradia
Shefali is a Partner with the firms corporate tax practice in Mumbai. With a specialisation in cross border taxation, she has over 20 years of experience in international tax. Shefali is extensively involved in advising multinational corporations on a range of issues in designing global holding and operating structures, structuring inbound and outbound investments, cross border mergers, acquisitions and other corporate reorganizations. She is also involved in developing and implementing domestic and international fund structures for leading investment and private equity fund houses. In addition, her work covers advice to several pharmaceutical companies, and software and e-commerce companies in the IT industry. Within the financial services industry, she advises banks in designing structured finance products and works with several fund houses and asset management companies. Shefali has most recently been conferred as one of Asias pre-eminent lawyers for taxation in the Asia Law Leading Lawyers Survey 2011 and has featured in the Legal Whos Who of Corporate Tax Lawyers and The Private Funds Lawyers for the third consecutive year in 2011. She is a regular writer and lecturer on international tax topics and has contributed to the India chapter on Is there a Permanent Establishment? for the 63rd IFA Congress in Vancouver, 2009. She is also a member of the core group on International Tax of the Bombay Chartered Accountants Society. Shefali is a graduate in Commerce from the University of Mumbai and qualified as a Chartered Accountant in 1991.
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Disclaimer: This presentation has been prepared for clients and Firm personnel only. It provides general information and guidance as on date of preparation and does not express views or expert opinions of BMR Advisors. The presentation is meant for general guidance and no responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this presentation will be accepted by BMR Advisors. It is recommended that professional advice be sought based on the specific facts and circumstances. This presentation does not substitute the need to refer to the original pronouncements
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