UPDATE ON INTERNATIONAL PLANNING ISSUES AMSTERDAM
Investment in India – a fresh look
[ NIKHIL MEHTA ]
THE NEW GOVERNMENT IN INDIA HAS A CLEAR majority, and we may expect positive changes.
Royalty planning [ ANNE FAIRPO ]
THE ISSUE OF WHERE cross-border transactions
are to be taxed is of long standing. Governments want to attract innovative business. There are many jurisdictions offering tax relief for R&D, but only a few offer a lower tax rate to the resulting royalties – the ‘Patent Box’ – for embedded income or direct income. The Box offers a deduction in computing trading profits, rather than a lower rate of tax; there are conditions on ownership, development (sometimes), active management and computation of profits. The OECD has been looking at the Patent Box with a view to eliminating its ‘harmful’ effect. It is proposed that relief be related to R&D taking place in jurisdiction and that there should be reporting requirements and limitation to patents and their functional equivalents. There are problems in valuing IP: valuation may be based on market prices, cost or income. The OECD emphasis is on substance. The Seven Network case in Australia considered the nature of a royalty for tax treaty purposes. There is pressure from the BEPs project to limit the tax planning possibilities of royalties.
In the 1970s, the restrictions on foreign ownership caused foreign companies to leave. The black economy continues to thrive. The appeal process is slow. Foreign investment has been encouraged from the 1990s. The Direct Taxes Code is commendably short but very unsatisfactory; revised versions have included a GAAR. In Vodafone, the sale of the operating company took the form of a sale of a Cayman company by a BVI company; the assessment was made on Vodafone, the purchaser. Vodafone won in the Supreme Court, but the decision was reversed – retrospectively – by legislation. In 2012, the Shome Committee recommended changes, some of which were enacted in 2015, but there are still reporting requirements and not all the proposed exemptions were enacted. The GAAR is of wide application and is expected to come into force on 1 April 2017. This postponement presents opportunities for both new and existing treaty structures.
Both India and Mauritius
have announced their commitment to the tax treaty. A new POEM test for residence comes into effect next April. The rules affecting foreign investors have been eased with effect from April 2015, but only to a limited extent. There is a new tax on evasion, with a limited opportunity for voluntary disclosure. While the finance ministry wants to attract investment and the courts apply the Duke of Westminster principle, the tax administration has difficulty in distinguishing avoidance from evasion.
The anatomy of tax planning
The rules affecting foreign investors have been eased to a limited extent.
[ MILTON GRUNDY ]
AN INDIVIDUAL CAN reduce his tax exposure by
change of residence, but may still need tax planning to moderate his exposure to withholding taxes on foreign dividends, trading profits and royalties. A capital gains tax free sale of a successful enterprise needs to be planned well in advance. A group of ‘thin’ trusts may be partners in an offshore partnership; if shares of partnership profits are not ascertainable until a future date, the beneficiaries cannot be taxed until the shares are ascertained. Treaty benefits may be enjoyed by a Swiss partnership with little connection with Switzerland. For UK tax purposes, shares in an offshore company purchased from a stranger enjoy tax benefits not enjoyed by shares for which the taxpayer has subscribed. This also applies to trusts.
A capital gains tax-free sale of a business needs planning.
The ITPA Green Book 2016
www.itpa.org
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