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Doing Business with
European Union
Narayan MehtaFeb 3rd 2006
2
Road map
Indian Investments in EU – some statisticsEU investments in IndiaEmerging opportunitiesEntry Vehicles – LO / Branch / Subsidiary
Tax & regulatory overviewCase studies MFN ClauseApproach & caution pointsAbout SKP
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Investments from India to EU
EU is a major destination for Indian investors - approx. 40 % of Indian overseas investment flows into Europe, as compared to 20 % to the USAIndia's FDI inflows into the EU have been increasing and amounted to € 600 million in 2003 (€140 mn in 2002). EU investment has mainly taken place in the power/energy telecommunications and transport sectors. UK has emerged as the No ! destination for Indian Companies setting up in the EU, with investment increasing by nearly 30 percent during the 2004-5 fiscal year During 2004 EU-India trade increased by 17% and has increased with an annual average of 6% between 2000 and 2004.
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Some of the Indian companies in EU
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EU Investments in India
From August 91 to Sept 05 -EU countries accounted for 21.08% of total FDI
Top 10 EU countries accounted for 20.54% of total FDI
Top 10 EU countries accounted for 97.45% of total investments from the EU
Top 10 EU investorsFrom August 91 to Sept 05
Country US$ bn
Netherlands 1.95
UK 1.90
Germany 1.32
France 0.77
Sweden 0.472
Italy 0.467
Denmark 0.15
Belgium 0.14
Cyprus 0.084
Finland 0.043
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Investments from India to EU - Old
From August 91 to Sept 05- Top 10 EU investors % of total investments from EU countries to total FDI-
Growth rate over previous year i.e. Jan-Dec 2004 - % of total investments from TOP 10 EU countries to total FDI - Growth rate over previous year i.e. Jan-Dec 2004 - % of total investments from TOP 10 EU countries to total investments from the EU - Growth rate over previous year i.e. Jan-Dec 2004 -
Country US$ bn
Netherlands 1.95
UK 1.90
Germany 1.32
France 0.77
Sweden 0.47
Italy 0.46
Denmark 0.15
Belgium 0.14
Cyprus 0.084
Finland 0.043
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Emerging opportunities - Sectors
Science & Technology Infrastructure Agriculture Industry Business Process Outsourcing (Eastern Europe)
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Entry strategies
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Liaison/ representative offices
Useful to test the marketsPurchasing offices, collecting information, etc.Wider range of activities could be carried out through
Coordination centersGenerally taxed @ 5-10% of expenses
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Indian Co
EUbranch
Secondment of staff to branch and execution of
the contract off-shore and onsite
…………………………………………………………………………... India
EU
Marketing in EU
Project mgt & sales support
Principal contract for software development
EUcustom
er
Branch
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Branch Office
For initial expenditure (cum limits for all offices)2% of 2 yr average annual sales
For recurring expenditure1% of 2 yr average annual sales
No limits in case of EEFC a/c & STPsIn case of IT Cos - 100% of offsite billing & 30% of onsite billing to be repatriated to India
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Indian Co
EUWOS
EUcustome
r
Contract foroutsourcing
Secondment of staff to subsidiaryand execution of the contract
off-shore and onsite
Principal contract for software development
…………………………………………………………………………... India
EU
Consideration
Marketing in EU
Project mgt & sales support
Consideration
Wholly Owned Subsidiary
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Approval from Authorized Dealer
No monetary limit on investment by Indian CosEquity, debt and guaranteesSubject to 200% of net worth of parent / sub as per last audited balance sheet
Not applicable in case proceeds of EEFC A/c & ADR / GDR are used
Capitalization of goods, services allowed
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Approval from Authorized Dealer
Investment in bonafide business activityInvestment through hold co. also covered!
Step down investments also under the automatic route
Share valn for investment in existing company
By overseas Merchant / Investment Banker for investment above US $ 5 mn By a CA / CPA
Special rules apply for investments in Financial Services Sector Co
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Approval from Authorized Dealer
Even qualification shares can now be acquired by an individual director sub to certain conditions!Recent liberalisations include partnership firms as well!Individuals investments allowed up to US $ 25,000
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Non automatic route - RBI approval
Applies to all cases that do not fulfill automatic route conditionsDetermining factors:
Prima facie viability of projectContribution to external trade & other benefitsFinancial position & track record of Indian & foreign partyExpertise & experience
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Branch v/s Subsidiary
BranchSimplicity of formation and administration Indian Co’s assets exposed to foreign liabilityPayments of Royalties , Interest by Branch to HO not deductible for tax purposes
SubsidiaryEnjoys local credence and patronageSub - stock options possible, more autonomySub - can form branches elsewhereTax Deductible
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Branch v/s Subsidiary
BranchForeign clients may not be comfortable in signing contracts with branch Restrictions on borrowingReporting requirements
SubsidiaryPossible to defer Indian tax liability by not declaring dividends
European holding companies - a useful base for global expansion
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Levels of international tax planning
IndiaIndia
Corporate Tax
Withholding tax on distributions
* Royalty / FTS / Interest / Div etc
Income*Equity / Debt
EU countryEU country
Indian Corp tax on foreign income
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Objectives
To shelter profits of EU co. from Indian taxTo reduce w.tax on dividends in EU countryTo reduce / defer Indian tax on foreign dividendsTo reduce / defer tax in India on capital gains on sale of shares in WOSUsed as an extraction base company for management charges, admin fees, etc.Other objectives:
accumulating profits in stronger currencyuse of Bilateral Investment Protection Treaty
EUEU
IndiaIndia
X Co.X Co.
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Selecting a holding company site
Tax rateTax exemption for foreign dividends and capital gainsCan funds be parked?Exchange controlPolitical stabilityTax treaty networkAny withholding taxes?Anti-treaty shopping regime
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Austria Belgium Denmark GermanyLuxembourg
Netherlands
Spain UK
Dividends Exempt 95% Exempt Exempt Exempt Exempt Exempt CreditParticipations
10% 10% 20% - 10% 5% 5% 10%
Holding Period
1 year - 1 year - 1 year - 1 year -
Capital Gain Exempt Exempt Exempt Exempt Exempt Exempt Credit ExemptParticipations
10% - - - 10% 5% - 10%
Holdoing Period
1 year - 3 years - - - - -
European Holding Companies -Comparison
European holding company - a comparison
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MFN Clause
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MFN Clause- India- Netherlands Treaty
Particulars90-91 91-96 96-97 97-98 98 onwards
Royalties for copyrights, patents, etc- Rate 20 20/15 15 10 10
- Scope Broad Broad Broad BroadChange in Definition
Use of equipment - rate20 20/15 15 10 10
Technical services- Rate 20 20/15/10 20/15 10 10
Payments for royalties / technical services made during
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MFN Clause- India- Belgium Treaty
Particulars Original treaty 1st April 98 onwardsRoyalties for copyrights, patents, etc- Rate 20 10- Scope Broad Change in DefinitionUse of equipment - rate
20 Not taxableTechnical services- Rate 20 10
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MFN Clause- India- France Treaty
ParticularsOriginal treaty 95-96 96-97 97-98 98 onwards
Royalties for copyrights, patents, etc- Rate 20 20/15 15 10 10
- Scope Broad Broad Broad BroadChange in Definition
Use of equipment - rate
20 10 10 10Not
taxableTechnical services
- Rate 20 20/15/10 20/15 10 10- Scope Broad Restricted Restricted Restricted Restricted
Payments for royalties / technical services made
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MFN Clause- India- Sweden Treaty
Particulars Original treaty 98 onwardsRoyalties for copyrights, patents, etc
- Rate 10 10- Scope Restricted Restricted
Use of equipment - rateNot taxable Not taxable
Technical services- Rate 10 10
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MFN Clause- India- Spain Treaty
Particulars
As per Original treaty 96-97 97-98 98 onwards
Royalties for copyrights, patents, etc- Rate 20 15 10 10
- Scope Broad Broad BroadChange in Definition
Use of equipment - rate10 10 10 Not taxable
Technical services- Rate 20 15/10 10 10
- Scope Broad Restricted Restricted Restricted
Payments for royalties / technical services made during
Case studies
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Acquisition – equity swap
Indian Co
Indian Co
UK CoUK CoUK Share holders
Indian Share holders
100%
100%
32
Acquisition – equity swap
100%
Indian Co
Indian Co
UK CoUK Co
49% equity
UK shareholdersExempt Capital Gains
Indian shareholders51% equity
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Acquisition – equity swap
Valuations –coordination between UK & Indian valuersFIPB approvalRBI approvals after FIPB permissionRollover relief for capital gains available to UK shareholders!
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Outbound investments into EU / Non-EU countries
Indian co establishing subs in Mauritius, HK, UK, Philippines & Thailand – thru direct holdingIf held directly – the Indian tax rate on dividends was 35%
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One of the options – OHQ structure
Indian coIndian co Sing OHQSing OHQ
Philip coPhilip co
UK coUK co
Thai coThai coNeth coNeth co
HK coHK co
Mau coMau co
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Tax effect !
Tax rate on divs from Mauritius & HK dropped to 9% from 35%Tax rate on other divs routed via Netherlands dropped to 15% from 35%This model could be used for large Indian software cos
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To conclude
Spending more time at the drawing board saves costs!!Tying up commercial, tax and non-tax considerations in selection of branch v/s subsidiaryChanging legislationTreaty interpretations – can be varied
Don’t leave anything open to interpretationIntermediate entity must have substance
Anti-avoidance rules
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To conclude
Billing methodology especially for IT companiesPlanning employee secondment Formulating a transfer pricing policy
Based on a functional analysis Considering EU and Indian regulations
Needs coordination with local tax advisers
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Beyond just advice,we provide comprehensive solutions...
Mumbai Bangalore Pune Hyderabad New Delhi Coimbatore Chennai
SKP
Outsourcing
Single Window Service
InternationalTax &
Transfer Pricing
Business Advisory & Assurance
Accounting & Audit
Domestic Tax
Outbound
Consulting
About SKP
We are SKPEstablished in 1962Today, combines specialist services of 4 entities
Sudit K Parekh & Co – An accounting firm with specialized expertise in manufacturing, banking and financial services, information technology, health care and poultry businesses
SKP Crossborder Consulting Pvt Ltd – Multi-disciplinary consulting company providing turnkey business setups, outbound investments, international tax, joint ventures and acquisitions, transfer pricing and international contract structuring
SKP e-Solutions Pvt Ltd - Provides seamless outsourcing solutions in finance and accounting, tax returns, payroll etc
SKP Astral Consulting Pvt Ltd - Dedicated exclusively to management assurance and information technology related services
We are SKP8 practice areas
180 people across 8 locations in India
10 partners and 5 directors
130 international clients from 25 countries as well as several large companies / MNC’s in India
A large network of Over 100 member accounting, business consulting and tax advisory firms in 50+ countries across 250 cities in the world
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ContactNarayan MehtaTel: +91 22 2282 1141Mobile: +91 98205 44495E-Mail: [email protected]
Thank You