PAPER IIG INDIA OPTION

Transcription

1 THE ADVANCED DIPLOMA IN INTERNATIONAL TAXATION June 2014 PAPER IIG INDIA OPTION ADVANCED INTERNATIONAL TAXATION TIME ALLOWED 3¼ HOURS You should answer FOUR out of the seven questions. Each question carries equal marks. Start each answer on a new sheet of paper. If you are using the on-screen method to complete your exam, you must provide appropriate line breaks between each question, and clearly indicate the start of each new question using the formatting tools available. All workings should be made to the nearest month and US Dollar unless the question requires otherwise. Marks are specifically allocated for presentation.

2 1. Azura Ltd (Azura), a company incorporated in the United Kingdom, develops communication systems that use VOIP (voice over internet protocol) technology to make phone calls. Azura has developed its unique version of VOIP technology, which enables voice telephony over the internet. Azura also manufactures phones which make use of this technology. Azura is considering various options regarding the Indian market. One option is to sell the phones directly to Indian telecom companies, who will in turn enter into service contracts with customers in India. The phones would have the Azura developed VOIP technology embedded in them and Azura will not charge separately for such technology. The contract for the sale of the phones to the Indian telecom companies would be signed in the United Kingdom and the payment would be made in Pounds Sterling directly into Azura's UK bank account. A liaison office in Bangalore, India, would assist Azura in its Indian business. The scope of the work conducted at the liaison office is flexible, depending on the most tax efficient structure feasible under the circumstances. Another option for Azura would be to sell its phones through an internet site. The phones would have the Azura VOIP technology embedded in them and Azura will not charge separately for such technology. The customers in India would sign a contract online through an electronic signature system. The website is hosted by a server based in the United Kingdom. A third option for Azura would be to license its technology to third party phone manufactures (TPMs) based outside India. The licensing agreement between Azura and TPMs would be signed in the United Kingdom, and the payment would be made in pounds sterling directly into Azura s UK bank account. The TPMs would embed Azura s VOIP technology into the phones which they manufacture. These phones would be sold to telecom companies in India under contracts signed between the TPMs and the Indian telecom companies, with both the signing of the sales contacts as well as payments occurring outside India. In order to gain more visibility in the Indian market, Azura has decided to be one of the major sponsors for the International Squash Cup (ISC), which holds all its games in Bangalore, Bombay and New Delhi. The media rights to ISC are held by Redones Ltd (Redones), a company that is incorporated in Mauritius. All sponsorship contracts are signed in Mauritius and payments are made in US dollars at a bank in Mauritius. Azura will pay Redones $2 million for its name and logo to be displayed prominently on the ISC Champions Cup, awarded to the eventual winners. Other than the holding and transfer of media rights, Redones does not have any other activities in Mauritius or elsewhere. You are required to give Azura your responses to the following questions: 1) Are there any Indian tax implications for Azura on the sale of telephones to Indian telecom companies under the first option? (5) 2) Under the first option, how would you structure the liaison office s activities in order to achieve a tax efficient outcome under Indian tax law? (4) 3) What would be the Indian tax consequences for Azura of products sold online to Indian customers under the second option? (5) 4) What would be the Indian tax consequences for Azura, if any, of (a) Azura licensing technology to TPMs and (b) TPMs selling phones using this technology to Indian telecom companies under the third option? (6) 5) Would there be any Indian withholding tax obligations for the sponsorship payments made by Azura to Redones? Consider if any protection can be offered in the contract documentation between Azura and Redones to achieve a tax efficient outcome under Indian tax law. (5) Page 2 of 8

3 2. The Raven Vector Group (RV Group) has a holding company in the United Kingdom (RV UK). The RV Group manufactures electricity saving lighting equipment aimed at the luxury home market and has been a global market leader for the past twenty-five years. The RV Group's policy is to have RV UK hold shares in three subsidiaries (RV Hong Kong, RV India and RV USA). The three subsidiaries are involved in the business of manufacturing, marketing and selling lighting equipment in their respective territories. RV India has been in existence for the past seven years. While the Hong Kong and US subsidiaries have made losses in the previous two years, RV India has made steady profits in the last five years and is expected to increase its profits in the near future. RV India has never paid a dividend. In December 2010, RV UK subscribed to additional equity in RV India of 50m at a price of 500 per share. RV India is now considering returning value back to its shareholder through a buyback. The proposal is to have RV India buy back 50% of its share capital and return 150 million to RV UK. In February 2014, RV UK was approached by a US private equity group interested in buying the Indian business. It has been suggested to RV UK that RV India s shares should be transferred to a Cayman Islands company (incorporated for the purposes of the transfer) followed by a sale of the shares of the Cayman Islands company to another existing Cayman Islands subsidiary within the US private equity group. Negotiations are continuing between the parties. In an unrelated development, RV India is planning to undertake a major marketing and brand building exercise in The purpose of the exercise is to raise awareness of the RV brand, through a series of advertising features promoting the unique features of RV s lighting equipment. The advertising blitz is planned on a variety of media platforms with at least one half of the expenses focused on online advertising. RV India anticipates that the expenses incurred on the 2014 marketing exercise would be sufficient to reduce its 2014 profits by half. In order to finance the brand building exercise, RV UK is planning to obtain funding from a bank in the Cayman Islands and on-lend to RV India. The RV Group s finance director has approached you for advice regarding the following: 1) Would there be any adverse Indian tax consequences regarding the additional subscription of shares in RV India, from the perspectives of RV India and RV UK respectively? The finance director is particularly worried that a recent amendment to section 56, ITA might impact upon this subscription and would like your advice on the applicability of this amendment. (5) 2) What are the Indian tax consequences of the buyback from RV India, from the perspectives of RV UK and RV India respectively? Would it be more tax efficient to return value to RV UK by way of a dividend? (6) 3) What are the potential tax pitfalls from the Indian point of view if the proposals of the US purchaser are accepted? (6) 4) Are there any Indian tax implications from the marketing expenses incurred by RV India? (5) 5) What are the Indian tax consequences, if any, of the borrowing by RV UK and the on-loan to RV India? Will either RV UK or RV India need to withhold tax on the interest they pay on their respective borrowings? (3) Page 3 of 8

4 3. Stet UK, a company based in the United Kingdom, is a global medical supplies company with wholly owned subsidiaries in India (Stet India) and Singapore (Stet Singapore) respectively. Stet India is profitable and a sale of Stet India would result in a capital gain of 200 million. Over the course of a review of its international operations, Stet UK decided to rationalise its operations by designating Stet Singapore as the holding company for all present and future subsidiaries in the Stet Group. However, Stet UK would continue to hold all the shares of Stet Singapore. This decision was taken because the Stet Group management considered Singapore as the best entity to concentrate the organisation s managerial and financial expertise for the Asian and African regions. Consequently, in December 2010, Stet UK transferred all the shares of Stet India to Stet Singapore for no consideration. In February 2011, Stet Singapore incorporated another subsidiary in the Cayman Islands (Stet Cayco). In April 2011, Stet Singapore transferred 10% of the shares of Stet India to Stet Cayco. For the past five years, Stet Singapore has incurred annual expenditure between $250,000 and $350,000 in office and incidental expenses. The board has met regularly in Singapore for the past five years, and the majority of the members of the board are resident professionals in Singapore. In January 2014, Stet UK entered into negotiations with a purchaser from the United States for the sale of the Indian business. The sale would proceed by Stet Singapore and Stet Cayco selling Stet India to the US purchaser. The sale is expected to be completed by December In the meantime, in an unrelated development, Stet India is planning a major investment in the form of an investment in a medical supplies factory on the outskirts of Bangalore. Stet India is in negotiation with the bank for a loan facility of 2 million. The bank would like the loan to be guaranteed by Stet UK before it agrees to release funds. Stet UK is inclined to provide the guarantee for no charge. You are required to advise the group finance director of the Stet Group on the following issues: 1) The finance director would like to know if the transfer of Stet India shares from Stet UK to Stet Singapore carried with it any Indian tax implications for Stet India and Stet UK respectively. (6) 2) What are the Indian tax consequences of the proposed sale of Stet India shares to the US purchaser (without reference to GAAR or judicial anti avoidance rules)? (10) 3) Regarding the sale of Stet India shares, is there an Indian tax risk in terms of GAAR and judicial anti-avoidance rules? (5) 4) What would be the Indian tax consequences, if any, of the loan guarantee provided by Stet UK? (4) Page 4 of 8

5 4. You have been asked to prepare a detailed memorandum of law for the tax counsel of a company incorporated in the United Kingdom, Lainlyn Ltd, that has a liaison office in Bangalore, India. Lainlyn s shares are listed on the London stock exchange. Lainlyn plans to regularly send its employees to Bangalore for periods ranging from four months to nine months every financial year, to work out of the liaison office. One major complication which Lainlyn's tax counsel and its employees are concerned about is that Lainlyn has issued ESOPs (Employee Stock Option Plans) to its employees with vesting periods that might end while the employees are serving their short stay at the Indian liaison office. It is anticipated that the employees might exercise their option as soon as the stock is vested and sell the stock soon after. Further, Lainlyn has entered into a tax equalisation agreement with its employees. You are required to prepare a detailed memorandum describing the ESOP tax consequences for Lainlyn and its employees, keeping in mind the circumstances described above. You must also comment on the Indian tax consequences of the tax equalisation agreement between Lainlyn and its employees. (25) 5. Jhalak Ltd (JH India) is an Indian company that has a profitable business in selling branded knitwear for men and women. The board of JH India has decided to expand overseas. JH India is considering various options regarding its investment into the United Kingdom, and expects to either make a loss or break even in the first two years of its entry into the UK market. You have been asked to advise JH India at a preliminary stage, at which two investment options are on the table. Option 1: JH India will establish a presence directly in the United Kingdom though an outlet shop. The land and building would be bought and owned directly by JH India and used to sell JH branded clothes to customers at prices fixed by JH India. JH India will hire a shop manager and four sales assistants, who would be paid in the United Kingdom in pounds sterling. Option 2: JH India will incorporate a subsidiary (JH UK) in the United Kingdom. JH UK will operate the outlet shop, own the associated land and building, and employ and pay the relevant personnel. JH would like to either own all the shares in JH UK directly or through a Mauritius subsidiary (JH Mauritius). You are required to present a paper to JH India's finance director answering the following questions: 1) If JH India were to use option 1 and directly own and operate an outlet shop in the United Kingdom, what would be the Indian tax implications of such a structure? (5) 2) If JH India would like to own JH UK directly under option 2, what might be the possible Indian tax consequences in terms of receipt of dividends and future exit options? In particular, when dividends received from JH UK are taxed by India, is there a tax credit available in India for taxes paid by JH UK to the United Kingdom on its corporate profits? (5) 3) If JH India were to own JH UK through JH Mauritius, what might be the possible Indian tax consequences in terms of future exit options? Can you suggest two other jurisdictions that might be more suitable for the holding entity? Give reasons for your choices. (5) 4) Would it be possible to accumulate the dividends received by JH Mauritius offshore without payment of Indian taxes? In the long term, are there any problems anticipated with accumulating dividends in this manner outside India? (5) Continued Page 5 of 8

6 5. Continuation 5) JH India is considering financing the UK investment through a Global Depositary Receipt (GDR), as well as a loan from a bank in the Cayman Islands. What would be the Indian tax consequences for the investors in the GDR issue, with respect to the dividends paid on the underlying shares and the future transfer of GDRs? What would be Indian tax consequences for JH India as well as the bank, with respect to the payment of interest on the loan? (5) Page 6 of 8

7 6. Quark Kelvin Ltd (QK) is a leading software company in the United Kingdom in the field of information research, statistical analysis and business intelligence. In 2009, QK entered into a consultancy contract with Amber Information Solutions (Amber Jersey), a company incorporated in Jersey. Amber Jersey's employees provide some discreet Indian statistical and business intelligence information to QK, which in turn processes this information as part of its software services for its Indian clients. QK entered into the information supply contract with Amber Jersey in Jersey, and payment is made in pounds sterling directly into Amber Jersey's bank account in Jersey. Amber Jersey's employees do all their India-related work in Jersey. QK s consultancy contract with Amber Jersey will come to an end in 2014, after which QK plans to source the relevant information directly by opening a branch office in Bangalore. When the contract comes to an end, Amber Jersey would be paid a termination fee. Amber Jersey would also be paid an additional sum of money as a noncompete fee in consideration for not participating in similar India-related information supply business for the next three years. QK performs software services for its Indian clients in the following two ways. If the clients so prefer, it provides the business software on its website which the clients can access remotely and run the software according to their needs. The Indian clients do not have access to the source code of the software used by QK. The software is not customised for any particular Indian client. QK charges a monthly fee for access to the software. The monthly fee is charged under an online contract, that is signed though an electronic signature online by the Indian clients. The server for the QK database is in the United Kingdom. QK also sells discs containing the same software to its Indian clients. The Indian clients enter into contracts with QK online and the discs are dispatched to the clients through an international courier service. Each set of discs is charged a separate price by QK. QK has hired a UK law firm, Pardners, to advise it on its Indian related operations. Pardners is a limited liability partnership formed under English law and has its office in central London. The associates and partners of Pardners work on India related issues both in the United Kingdom and in India, where most of the work is conducted in meetings at venues in Mumbai owned by third parties. In the fiscal year , the partners have spent a total of eight weeks in India, of which twelve days were spent holidaying in Goa. The associates have spent a total of six weeks in India, all of which time was spent on legal work. You are required to provide your opinion on the following questions asked by the finance director of QK: 1) What are the Indian tax implications, if any, of the payments made to Amber Jersey? QK's finance director took the position that that there is no Indian tax jurisdiction over these payments. (6) 2) How will the termination payment and the non-compete payments to Amber Jersey be taxed in India, if these payments are taxable? Are there any withholding obligations for QK? (4) 3) Would the Indian tax authorities have a claim over the online monthly fee charged to the Indian customers by QK? (4) 4) How would the sale of the software discs be taxed in India? (3) Continued Page 7 of 8

8 6. Continuation 5) What are the Indian tax consequences of the legal work undertaken in India and in the United Kingdom? Your answer must also address the threshold applicability of the India-UK tax treaty. The finance director is concerned that Pardners might not be able to avail itself of treaty benefits, since it is a fiscally transparent entity in the United Kingdom and is not liable to tax in the United Kingdom in its own right. (8) 7. You are required to write a paper on anti-tax avoidance measures in India addressed to the in house counsel of a leading multinational company looking to invest in India, addressing the following issues: 1) The current status of the GAAR in India including the main trigger factors, the implementation of GAAR, and its impact on Indian double tax treaties. (7) 2) The judicial attitude towards tax avoidance after the Azadi Bachao Andolan and Vodafone judgments. (7) 3) International tax avoidance initiatives by India through double tax agreements, such as provisions on exchange of information and limitations of benefits. (6) 4) Two practical examples of the application of GAAR to an international transaction. (5) Page 8 of 8