dr. anup p. shah - ctconline.org ca anup... · pravin p. shah & co., ca's 4 foreign...

- Dr. Anup P. ShahChartered Accountant

4th March 2017

PRAVIN P. SHAH & Co., CA's 1

Amendments

Mauritius

CG LOB

Cyprus

CG

Singapore

CG LOB



Foreign

Investors

Tax

Haven

IHC

Indian Investee

Co.

Indian

Promoters

Mauritius / Singapore /

Cyprus / Holland

33%

16%

8% 8%6% 6%

3% 3% 2% 1%0%

5%

10%

15%

20%

25%

30%

35%

Top FDI Destinations 2000-2016

$168 bn or 52% of all FDI was from 3 Tax Havens –

Mauritius ($108bn) / Singapore ($52bn) / Cyprus ($9 bn)

© PRAVIN P. SHAH & CO. 5

Treaty Shopping is valid and legal

◦ Can incorporate IHC in Tax friendly jurisdictions

◦ IHC is legal and beneficial owner of shares

◦ Entitled to benefits of favourable Treaty with India

◦ No Tax in India if Treaty so provides

◦ Series of Favourable Decisions ~ Azadi Bachao Andolan

(SC) / Vodafone International (SC) / Sanofi Pasteur (AP)


◦ Must obtain a TRC – S.90(4) r.w. Rule 21AB

Also provide Information in Form 10F if not already in TRC

TRC is sufficient for claiming Treaty Benefits

Azadi Bachao Andolan (SC)

CBDT Cir. 789 dated April 13, 2000

Vodafone International (SC) – In absence of LOB, TRC sufficient

Chiron Bearings GmbH (Bom) / Universal Int’l (Bom)

Dyanmic India (AAR) – No GAAR so TRC enough

AAR ~ E*Trade /Castleton / Moody’s / Armstrong Worldwide


◦ 4 Jurisdictions have been favourites for routing FDI into

India

Mauritius

Singapore

Cyprus

Netherlands

◦ 59% of all FDI from 2000 – Dec 2016 through these 4

◦ GoI trying hard to renegotiate DTAAs to plug Treaty

Shopping!!



94 Comprehensive

DTAAs

10-

Taxed in CoR

4 –

IHC Hotspots

2 with LoB

2 No LOB -GAAR

6 -

Other NationsNo LoB – GAAR

84-

Taxed in India

4 –

10% conditionNo LoB - GAAR

80 –

No Condition

38 with LoB

42 No LoB -GAAR


◦ In case of 4 DTAAs

Belgium

Denmark

France

Spain

◦ CG on alienation of shares taxable in India only if

Forming part of a Participation of at least 10% in an Indian

Company

◦ Else taxable in Country of Residence of alienator


Other Indian DTAAs

where CG taxed in CoR

LOB Clause

in DTAA

GAAR

will apply

CGT in Country of

Residence of Seller

Jordan (only if Jordan

taxes Capital Gains)

Yes

Kenya No

Philippines Yes

Portugal Yes

Sweden (only if Sweden

taxes Capital Gains)

Generally No CGT

Zambia No

◦ Wef 19th July 2016

◦ Till 2016 – Gains by Mauritian Resident taxed in M

Residence Based Taxation

◦ Residence based Taxation done away in 3 Phases

CG from alienation of shares acquired before 1st April 2017 –

taxable only in Mauritius

Irrespective of when and how alienated

CG from alienation of shares acquired after 1st April 2017 &

sold between 1st April 2017 and 31st March 2019 – taxable in

India @ 50% of CGT


◦ CG from alienation of shares acquired after 1st April 2017

& sold on or after 1st April 2019 – taxable in India @ full

CGT

◦ Source based for Shares ~ Equity / Preference / CCPS

◦ CG from alienation of any other property

Residence based Taxation Continues

Whenever acquired and Whenever Sold

Hence, taxable in Mauritius alone



1st Apr

‘17

31st

Mar’ 19

Acquired before

01.04.17 – No

CGT in India

Acquired & Sold

between these 2 dates

– 50% CGT + LOB

Acquired after 01.04.17

& Sold after 31.03.19 -

Full CGT in India

◦ Sale of CCPS

Art 3A – Shares acquired > 1.4.2017 Taxed in Mau

Shares includes CCPS also – However, Protocol silent

If CCPS sold as such – Exemption should be available

What if CCPS acquired > 1.4.2017 but conversion < 1.4.2017 and

then Equity Shares are transferred?

Is conversion of CCPS a Taxable Transfer?

Now no – FB 2017 wef 1st April 2017

What about conversion prior to 1st April 2017?


◦ CCDs now a very attractive investment option:

Interest taxable @ 7.5% v 40% earlier

CCDs continue to remain taxable in Mauritius

If CCDs sold after conversion

CCDs converted into shares > Apr 2017 – Grandfathering

If conversion < April 2017 – Which is the Date of

Acquisition?

Date of CCDs or Date of Conversion?

Mrs. A Ghosh / Naveen Bhatia

Rule 8A


Capital Gain Under Earlier DTAA After Protocol

Equity Shares in Ico Taxable in Mauritius Taxable in India in a

phased manner

CCPS in Ico Taxable in Mauritius Taxable in India in a

phased manner

CCDs in ICO Taxable in Mauritius Taxable in Mauritius

Derivatives Taxable in Mauritius Taxable in Mauritius

Sale of Equity after

conversion from

Preference Shares

Taxable in Mauritius ??


conversion from

Debentures

Taxable in Mauritius ??


◦ Resident cannot take benefit of Art. 13(3B) of Treaty

If Primary Purpose is to take advantage of benefits in Art

13(3B)

Art. 13(3B) – 50% concessional Tax Rate for 2 Years

Not for Art. 13(3A) – Nil Tax for shares bought before 1st April

2017?

Shell / Conduit MCo. not entitled to Art 13(3B)

Any Legal entity which is R of Mauritius

Negligible / Nil Business Operations or No real / continuous business

in Mauritius


Shell / Conduit MCo. not entitled to Art 13(3B)

Deemed Shell / Conduit Co.

If Expenditure on Operations in Mauritius < Mu Rs 15 lakhs in the

immediately preceding period of 12 months from date the CG arise

Not Deemed Shell / Conduit Co. if:

Listed on Recognised Stock Exchange of Mauritius

Expenditure on Operations in Mauritius ≥ Mu Rs 15 lakhs in the

immediately preceding period of 12 months from date the CG arise


Serco BPO v AAR (P&H)

◦ Stake Sale by Barclays Mauritius & Blackstone Mauritius

◦ AAR held that prima facie a colourable device and hence,

buyer liable to deduct tax u/s.195

◦ No reasoning given by AAR for decision

◦ Department’s Pleas:

Real Beneficiaries don’t actually reside in Mauritius

Sellers don’t carry on business / mfg / don’t provide services in

Mauritius

Claim to be Residents only on basis of TRC

Clear case of Treaty Shopping



◦ P&H HC negated all arguments of Dept

No material to show Tax Evasion

All documents asked by revenue were produced

TRC is a valid document – CBDT Cir. 789

Azadi Bachao Andolan (SC) has closely examined DTAA &

TRC issue – Treaty benefits available even if no tax in Mau

Art.13(4) applies to “other property” – taxable only in Mau

Art. 13(4) not dependent upon situs of property



Art.13(1) on Imm. Prop – situs dependent – taxable only in I

Art.13(2) – PE sale - situs dependent – taxable only in I

Art. 13(3) on ships/ planes – taxable where POEM located –

situs dependent

No such stipulation under Art. 13(4) – shares are movable

property taxable only in Mau

Since No Tax in India – No liability on Buyer to deduct tax

u/s. 195


Goldman Sachs (Mum)

Liability to deduct tax u/s. 195 only if Income taxable in India

in the first place

If under Indo-Mauritius DTAA no CG in India, then no TDS

obligations

If not liable u/s. 195, then cannot be an assessee in default

u/s. 201

C/f this decision with T. Rajkumar (Mad HC) – Cyprus


◦ Dow AgroSciences Agr. (AAR)

Fact that no dividends declared since several years

Thus, to the extent of Accumulated Profits = Sale Proceeds

of shares should be treated as Dividend and taxed in India

◦ C/f with Otis Elevator (AAR)

Buyback from Mauritian Co. alone

No Dividend declared for several years

Device to bypass Dividend being taxed in India

Held, buyback taxable as Dividend since not genuine


S.94A ~ Cyprus specified as Notified Jurisdictional Area

(Notification No.86/2013, dated 1.11.2013)

Implications of S.94A & R.21AC

◦ No deduction for any payment to FI in Cyprus

unless authorisation is furnished in Form 10FC

◦ No deduction for any payment to a Cypriot person

unless Specified Docs for 8 years

◦ TDS @ 30% or rate prescribed in the Act, whichever is higher


◦ Mad HC in T. Rajkumar – s.94A considered

Imp. Facts

Cypriot Co. invested in CCDs of Indian Co.

Promoters bought out CCDs @ Loss (Below Face Value)

ITO SCN – Why no TDS u/s. 94A

Mad HC:

“petitioners should have deducted tax at source …. and

thereafter fought a legal battle with the Department for

refund.”


◦ T. Rajkumar

S.195 neither considered nor cited

GE India / CBDT Instruction not considered

Is Mad HC’s decision in clear conflict with GE?

Practical position- deduct tax on gross amount payable

to Cypriot company?


Protocol to DTAA

◦ Notified on 10.01.2017

◦ Source based taxation after 1st April 2017

Gains from alienation of shares acquired on or after 01.04.17

– taxable only in India

◦ Grandfathered old investments made prior to 01.04.17

Gains from alienation of shares acquired at any time prior to

01.04.17 taxable only in Cyprus

Sale date not relevant


◦ No concessional transition tax @ 50% for 2 years

◦ Q. Would Interest be taxable @ 7.5% like for Mauritius?

No Interest tax remains @ 10% - same as before

◦ Clarification: Dividends not taxable / No TDS in India till

such time as India continues to levy DDT and Dividend is

exempt from tax u/s. 10(34)


◦ Surprisingly, No LOB in Protocol

No minimum spending threshold

No concept of PPT / Shell or Conduit Company

Unlike Mauritius and Singapore

Several Indian DTAAs amended to insert LOB

Only GAAR would apply in case of Cyprus?


◦ Notn. 86/2013

Cyprus treated as Non Co-operative Jurisdiction

86/2013 rescinded by Govt. wef 14.12.2016

Except things done / not done before such rescission

Q. What happens to TDS Litigation?

SC on T Rajkumar’s case

Appellant covered by rescinding Notification 14.12.16

and hence, it can take advantage of it?

Q. How to reconcile the two?


Signed on 30.12.2016

◦ Not yet notified in India ~ In force in Singapore wef 27.02.17

◦ Only Press Note from India but IRA of Singapore has

released the Protocol

Original DTAA amended by 2005 Protocol

Residence based taxation to Singaporean Residents

Benefits available as long as Mauritius DTAA exists

LoB Clause added


◦ Residence based Taxation done away in 3 Phases

CG from alienation of shares acquired before 1st April 2017 –

taxable only in Singapore

Irrespective of when and how alienated


sold between 1st April 2017 and 31st March 2019 – taxable in

India @ 50% of CGT


sold on or after 1st April 2019 – taxable in India @ full CGT


◦ Source based for Shares ~ Equity / Preference / CCPS

◦ CG from alienation of any other property

Residence based Taxation Continues

Whenever acquired and Whenever Sold

Hence, taxable in Singapore alone


Capital Gain Under Earlier DTAA After Protocol

Equity Shares in Ico Taxable in Singapore Taxable in India in a

phased manner

CCPS in Ico Taxable in Singapore Taxable in India in a

phased manner

CCDs in ICO Taxable in Singapore Taxable in Singapore

Derivatives Taxable in Singapore Taxable in Singapore


conversion from

Preference Shares

Taxable in Singapore ??


conversion from

Debentures

Taxable in Singapore ??


◦ Sing. Resident CANNOT take benefit of NIL CGT in India

u/Art. 13.4A of Treaty for shares acquired > 1st April 2017

IF

Primary Purpose to take advantage of this Article of DTAA

◦ Sing. Resident CANNOT take benefit of 50% CGT in

India u/Art. 13.4C of Treaty for CG between 1st April 2017

and 31st March 2019 IF

Primary Purpose to take advantage of this Article of DTAA


◦ Shell / Conduit Co. which claims it is a Singapore

Resident cannot take benefit of Art.13.4A (Nil CGT) or

13.4C (50% CGT)

Shell / Conduit ~ Any Legal Entity with Negligible or Nil

Business Operations or No real / continuous business

activities in Singapore


Shell / Conduit Sing Co. not entitled to Art 13.4A /13.4C

Deemed Shell / Conduit Co.

Art. 13.4A ~ If Expenditure on Operations in Singapore < S$ 2

lakhs in the immediately preceding period of 24 months from date

the CG arise

Art. 13.4C ~ If Expenditure on Operations in Singapore < S$ 2


the CG arise

For full exemption 24 months’ spending but for 50%

exemption only 12 months’ spending


Shell / Conduit Sing Co. not entitled to Art 13.4A /13.4C

Not Deemed Shell / Conduit Co. if:

Listed on Recognised Stock Exchange of Singapore

Singapore Exchange (SGX)

Art. 13.4A ~ If Expenditure on Operations in Singapore > S$ 2


the CG arise

Art. 13.4C ~ If Expenditure on Operations in Singapore > S$ 2


the CG arise


DTAA shall not prevent India from applying its

Domestic Law; and

Measures concerning

Prevention of Tax Avoidance or Tax Evasion!!

Q. What does this mean??

GAAR can override all provisions of the DTAA

Even if LoB Clause u/ Art 24A complied, GAAR can be invoked?

Then why have an LoB Clause at all?

No such clause in Mauritius or Cyprus


Factor Mauritius Singapore Cyprus Netherlands

Shs bought

before 1.4.17

Nil CGT in India

– whenever sold

Nil CGT in

India –

whenever

sold

Nil CGT

in India –

whenever

sold

• CG only N

• But taxable in I if:

• Seller owns

10% or more

stake &

• Sale to

Indian Res

• Above NA if:

• Gains in Corp.

reorgn, M / D;

&

• Buyer / Seller

own ≥ 10% of

Capital of the

Other

Shs bought

after 1.4.17 &

sold before

31.03.19

50% of CGT in

India

50% of CGT

in India

Full CGT

in India

Shs bought

after 1.4.17 &

sold after

31.03.19

Full CGT in

India

Full CGT in

India

Full CGT

in India

Tax on Interest 7.5% 15% 10% 10%


◦ What if Original Shares in Ico Bought before 01.04.17 but

Bonus

Stock Split

Shares on Merger by Transferee ICo

Shares on Demerger by Resulting ICo.

◦ All issued after 01.04.17?

Would Grandfathering be available under Mauritius /

Singapore / Cyprus Treaties?



Indirect

Transfer

Provisions

• No Clause for taxing

Indirect Transfers ~

South Africa /

USA/UK / Israel

• Not applicable to

Treaty countries –

Sanofi Pasteur (AP)

and FM’s Speech on

FB 2012

Same Same Same


◦ Majority DTAAs Do Not Contain such Provisions

IHC remains a Foreign Co. even under Expln. to s.9

Only Deemed to be situated in India - Does’nt become Indian

Co

DTAA – Art 13(5) / (6) deals with Other Property

Not shares of Indian Co.

Not shares of Imm. Prop. Co.

Other Assets Always taxable in CoR

Hence, under DTAA Indirect Transfers always taxable in CoR

Gains from Sale of M /S /C/ N Co. always taxable in M/S/C/N


Unlisted Gain Mauritius Singapore Cyprus Netherlands

LTCG Shs bought

before Apr 2017

Nil Nil Nil Nil

LTCG Shs bought

after Apr 2017 &

sold after Apr 2019

10% 10% 20% Nil

STCG Shs bought

after Apr 2017 &

sold after Apr 2019

40% or 30%

if FPI

40% or 30% if

FPI

40% or

30% if FPI

Nil

CGT Locally? No No No No if ≥ 5% held

in Ico

FDI % Apr 2016-

Dec 2016

35% 20% 2% 7%


◦ Anti-Treaty Abuse Measures in India’s DTAAs - 40

LOB: Specific Quantitative based Rule - Objective

Principal Purpose Test or PPT: General Qualitative Rule, Subjective,

case-by-case review

India’s DTAA contains different types of Measures

Objective LOB + PPT : 11 DTAAs – Mauritius, Singapore, Iceland, Sri

Lanka, Romania, Mexico, Uruguay, Tanzania, Tajikistan,

Subjective PPT : 28 DTAAs –UK, Finland, Norway, Malaysia, Malta, UAE,

Thailand, Poland, Indonesia, Taipei, Kuwait, Luxembourg, etc.

Objective LOB alone: 1 DTAA – USA


◦ Where LOB Clause in Treaty – No GAAR?

Shome Committee Report

LOB is SAAR. Hence, cannot substitute by GAAR

Comply with SAAR not GAAR

Till Circular 789 rules, GAAR cannot examine genuineness of

residency claim of NR – go by TRC alone

If inspite of LOB, evidence of violation of Treaty

Revisit Treaty

But yet No GAAR


◦ Will GAAR be invoked when LOB satisfied?

Adoption of Anti-abuse measures in Treaty may not be

sufficient to address all Tax Avoidance

& GAAR is required for the same

If avoidance is sufficiently addressed by LOB

No occasion for GAAR

Issues

Who decides what is sufficient?

When would you say that LOB is sufficient?


◦ GAAR when FPI / SPV set up in tax friendly

jurisdiction?

Depends upon main purpose of choice

If Jurisdiction of FPI / SPV based on Non-tax commercial

considerations and Main Objective not to obtain Tax Benefit

NO GAAR

Issues

Mere compliance with LoB Clause not entirely enough

Main Purpose would be checked - subjectivity


◦ GAAR to Corporate Actions / Conversions

GAAR not applicable to Investments made prior to 01.04.17

What happens to Shares issued after 01.04.17 arising out

of Corporate Actions / Conversions for Investments >

01.04.17?

No GAAR for

Bonus / Splits / Consolidation on Original before 01.04.17

Shares on Conversion of CCDs / CCPS /FCCBs/GDRs/ADRs

acquired before 01.04.17

Grandfathering available u/R.10U(1)(d)



LOB for Shs

bought

before 1.4.17

whenever

sold?

No LOB Yes. Ops Exp.

in Singapore

S$200,000 in

24 mts. prior to

sale of shares

No LOB No LOB.

GAAR for

Shs bought

before 1.4.17

whenever

sold?

Investments

before 01.04.17

grandfathered

from GAAR

Investments

before 01.04.17

grandfathered

from GAAR

Investments

before

01.04.17

grandfathered

from GAAR

Investments

before 01.04.17

grandfathered

from GAAR



LOB for Shs

bought after

1.4.17 but

sold before

31.03.19?

Yes. Ops. Exp. In

Mauritius ≥MU15 L

in 12 mts before

CG.

Yes. Ops Exp.

in Singapore

S$200,000 in

12 mts prior

to sale of

shares

No LOB No LOB.

GAAR for

Shs bought

after 1.4.17

but sold

before

31.03.19?

Yes if LOB does

not address tax

avoidance

sufficiently

Yes if LOB

does not

address tax

avoidance

sufficiently

GAAR

applies

GAAR applies

Express

GAAR

override?

No Yes. Art 28A No No



LOB / GAAR

for shares

sold from

01.04.19

Irrelevant since full

CGT in India –

Source based

Irrelevant

since full CGT

in India –

Source based

Irrelevant

since full

CGT in

India –

Source

based

GAAR till Treaty

not amended


◦ Gain on sale of shares always taxable as CG

Irrespective of frequency / period / quantum

No litigation whether CG or Business Income?

Eligible for DTAA Benefits in all 4 Nations

GAAR Grandfathering for Invst before 01.4.17

Mu/Sing/Cy DTAA Grandfathering for Invst before 01.04.17

No LOB for M / Cy for Invst before 01.04.17

No MAT

Indirect Transfers Rules NA for FPI-I or FPI-II


Benefit only if gain on sale of shares taxable as CG

Frequency / period / quantum

Litigation whether CG or Business Income?

What if C&M also Transferred? CBDT Cir May 2016

No exemption unlike AIF I and AIF II

GAAR Grandfathering for Invst before 01.4.17

Q. What if held to be Stock-in-trade does it change the scenario?

Mu/Sing/Cy DTAA Grandfathering for Invst before 01.04.17

No LOB for M / Cy for Invst before 01.04.17

No MAT

No Exemption for Indirect Transfers Rules but out because

Treaties have no look through / indirect provisions


◦ Should IHCs / Funds / FPIs migrate to Holland?

Tax in Netherlands only if less than 10% held in Ico OR

10% or more but sold to non-Indian Resident

FPIs cannot hold more than 10% of an Ico under SEBI Regs

No LoB Clause in Dutch Treaty

◦ Q. Would migration attract GAAR?

CBDT– No GAAR If Jurisdiction choice on Non-tax commercial

considerations and Main Objective Not to obtain Tax Benefit

◦ But for New Structures worth considering!

Also consider Spain and France!!


dr. anup p. shah - ctconline.org ca anup... · pravin p. shah & co., ca's 4 foreign...

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