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Tax May Rise On Outbound M&As, Indian Mncs Investments
June, 13th 2017

Indian companies are preparing to shift overseas investment companies from tax havens such as Mauritius after about 100 countries, including India, agreed to adopt a common tax treaty curbing loopholes frequently used by multinationals to avoid taxes.

The base erosion and profit shifting framework (BEPS) is aimed at providing uniform tax regulations for all investors, irrespective of which destination they come from and where they invest.

For India, this seems to be aimed at bringing into the tax net some foreign investors investing in domestic capital markets by taking advantage of few loopholes. But many companies are also waking up to the undesired consequence of this.

Indian companies now realise that this could mean higher taxes on existing investments in foreign soil routed through Mauritius, Cayman Islands and British Virgin Islands etc especially if they have used shell companies registered in such havens. “Many countries are taking an aggressive stance on taxation and our concern is that this would impact normal business operations.

Although it's too early to decide whether we will change structure of our operations we are evaluating whether we would be impacted,” said CEO of an automobile componenant manufacturing company that holds a subsidiary in the US through an investment arm in Mauritius.

Although it's too early to decide whether we will change structure of our operations we are evaluating whether we would be impacted,” said CEO of an automobile componenant manufacturing company that holds a subsidiary in the US through an investment arm in Mauritius.

“Questions would now be asked on the business reasons for investing in an outbound country through a holding country. There will have to be business reasons for pass through companies and shell companies would be denial of tax concessions by the country through which investments are made,” said Girish Vanvari, national leader, tax, KPMG India.

Experts point out that more tax regulations is set to impact operations of the multinationals going ahead. “Multilateral agreements will have far reaching implications not just on the inbound investments made by investors or MNCs operating in India but also outbound investments or M&As made by Indian companies. Many companies may be using intermediate holding companies just as a pass through vehicle for investing in Europe, USA or Africa.

“These companies would need to review their holding/operational structures to make sure they meet the LOB (limitation on benefits)/PPT (principal purpose test),” said Ajay Rotti, partner, Dhruva Advisors.

Both LOB and PPT are basically rules any company have to follow. These rules are basically outlines aimed at make it impossible to establish shell or post box companies that are only used to route investment from one country to another.

“The combination of GAAR (general anti-avoidance rule) and Special anti-avoidance rules at each country level, and Limitation of benefit clauses and now, multilateral agreements, at the international level, has put significant pressure on MNCs to be extremely careful and too conservative in tax matters; one hopes that the government sees these as deterrents, and not as tax collection measures,” says Ketan Dalal of Katalyst Advisors.

Currently many Indian pharma companies use Switzerland for parking patents generated domestically. Also many oil and gas companies along with some auto companies use tax friendly countries like Mauritius, Cyprus, Bahamas or Luxemburg to set up a pass through vehicle for investing in the destination countries.

The companies set up in the tax friendly destinations on many occasions hold on to dividends or royalty. Neither are these taxed in the foreign country nor in India.

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