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Income - Tax lens on buyouts of unlisted
September, 07th 2009

Acquisition of unlisted foreign companies by Indian corporates has come under the scanner of income-tax (I-T) authorities who plan to scrutinise the deals to ensure they are not being structured to evade tax. Deals involving equity swaps are particularly in focus, as these could be used to transfer part-ownership of Indian companies to overseas jurisdictions.

An I-T department official told ET that valuation of unlisted entities in many countries is an unregulated area as no public interest is involved. This allows acquisition of unlisted foreign companies at inflated valuations.

As a result, a large amount of cash or ownership of Indian company moves to a foreign entity and essentially amounts to asset-stripping of the domestic firm, which could have tax implications, he added.

The Indian company surrenders cash or equity and receives shares in a foreign company the real value of which may be a lot less, which is effectively a net asset loss for the Indian firm. The I-T department wants its officials to closely examine such deals to ensure the tax due to the domestic authorities is not avoided.

The official said the fundamental objective behind the departments proposal is to prevent tax evasion by domestic entities, as they may not declare actual profit or gain through these transactions.

The department is particularly training its guns on acquisitions carried out through equity swaps instead of cash. Manipulated swap ratios can be used to transfer ownership and thereby profits to foreign companies and avoid tax, he said.

The need for a closer look at cross-border transactions has been increasingly felt with India becoming a hotbed of such deals in the past few years. According to Grant Thornton deal tracker, the total number of mergers and acquisitions in calendar year 2008 stood at 458 involving a total announced value of $30.95 billion.

A proposal to set up a specialised investigation unit to investigate cross-border transactions is being examined by the apex direct tax body, the Central Board of Direct Taxes. Taxation issues thrown up by big cross-border transactions figured at a recent tax conference of income-tax commissioners and directors general.

Field formations have been asked to remain vigilant to such transactions and take action in suspect cases.

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