DRAFT GAAR GUIDELINES (INDIA)

July 12, 2012

In association with

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GAAR PROVISIONS

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GAAR A SNAPSHOT
Effective April 1, 2013 (ie for transactions pertaining to tax year 2013-14) Doctrine of substance over form codified to deter tax avoidance No carve out for genuine tax planning Trigger for GAAR - main purpose or one of the main purpose is to obtain tax benefit

Authority of Advance Rulings (AAR) may be approached for determining applicability of GAAR Onus to prove that transaction meant to obtain a tax benefit on the Indian Revenue Authorities (IRA) GAAR panel to approve the application of GAAR If GAAR invoked, Revenue empowered inter-alia to:
disregard or combine any step in the arrangement look through the arrangement by disregarding the corporate structure re-allocate income/ expense, re-characterize equity into debt or debt into equity treat the place of residence of any party or situs of an asset or transaction other than place or location mentioned in the arrangement
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DRAFT GUIDELINES ON GAAR

Draft Guidelines issued by Chairman, Central Board of Direct Taxes (CBDT) to give recommendations and suggest safeguards for proper implementation of GAAR The Draft Guidelines give a sneak preview into the mindset of the IRA The legality of the Draft Guidelines can be questioned as they propose to overrule the provisions of the domestic tax statute and the international tax treaties Draft Guidelines contain explanation of GAAR provisions and illustrations for applicability of GAAR

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DRAFT GUIDELINES ON GAAR (CONT)

Impact on Foreign Institutional Investors (FII) Two options given under the proposed safe harbor : FII to pay tax under the domestic tax law (ie not to avail treaty benefits) or Avail tax treaty benefits but be open to application of GAAR; however GAAR not to apply to non-resident investors of the FII

Unilateral payment of tax not exactly a safe harbor! Constitutionality of safe harbor requiring outright payment of tax in lieu of non- application of GAAR could be questioned No special treatment for FIIs No clarity on level of substance required to be established by FIIs / PE Funds and if the level would be the same as in case of other holding/operating companies? More clarity could be expected in the coming months
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DRAFT GUIDELINES ON GAAR (CONT)

Impact on holding company structures / treaty shopping Use of Mauritius / Singapore as intermediate jurisdictions for future investments? Kind of substance to be established to defend the treaty benefits not clear: Substance mentioned in the draft guidelines conclusive to get out of GAAR? Substance mentioned in the draft guidelines BoD meetings in the country, carrying on business with adequate manpower, own capital and infrastructure Beneficial ownership test to be satisfied under GAAR in cases where the Mauritius / Singapore company is only a permitted transferee
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Impact on business re-organisations Merger of two companies with carry forward of loss not subject to GAAR if specific conditions for merger satisfied Buy back of shares subject to taxation under GAAR - inconsistent with principles laid down under the domestic tax law

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DRAFT GUIDELINES ON GAAR (CONT)

Relevance of Circular 789 in the context of the draft guidelines GAAR will override Circular 789 Mauritius investments subject to GAAR Circular 789 (dated April 2000) issued by the CBDT states that the Mauritius tax treaty benefit shall be available if a valid Tax Residency Certificate (TRC) is provided

Therefore, existing and future US investments to be within the GAAR purview Mauritius looking to negotiate grandfathering of the existing investments?

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DRAFT GUIDELINES ON GAAR (CONT)

Onus to prove that a tax benefit was taken on the Revenue Tax officer to state how / why the arrangement is captured within the GAAR purview Reasoning given by the Revenue could be general (eg investing through Mauritius for treaty benefit, setting up an entity in India itself etc) Unreasonable requests for information/documentation by the revenue anticipated Draft format of the Reference Form prescribed the onus to prove on tax officer not well read into the same Practically difficult in arguing before the GAAR panel that the Revenue has not discharged the onus and has only made allegations without reasoning / evidence
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KEY TAKEAWAYS
Negatives No grandfathering for existing investments under GAAR Assumedly low monetary threshold for non-application of GAAR Reference procedure for application to the GAAR Panel reads as if the onus to prove still on the taxpayer Examples in the Draft Guidelines unclear No granular substance requirements provided Basic treaty benefits sought to be covered within the GAAR ambit
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Illustrations are not sophisticated but amateurish GAAR to override the international tax treaties (no unequivocal statement in respect of bi-lateral tax treaties made by the Government) Repatriation of profits by buy back of shares instead of distribution of dividend subject to GAAR

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KEY TAKEAWAYS
Positives Reference to tax mitigation made for the first time to be kept outside the GAAR purview Clarity on LoB clause in the Singapore tax treaty and the kind of expenses which will not be considered in calculating the threshold limit (eg interest on loan from shareholder) Declaration of dividend stated to be a business choice GAAR held not to substitute SAARs Similarly, in the absence of anti-deferral provisions (ie CFC provisions), GAAR not to be applied
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Choice of raising equity vs debt, again stated as a business choice In the absence of thin capitalization rules, GAAR cannot be invoked (however, Transfer Pricing shall apply on interest payments to related parties) Merger of loss making entity into profit making entity outside GAAR owing to existence of SAARs in the statute

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CONCLUSION
Sale of shares of Mauritius / Singapore company taxable as indirect transfer under the domestic tax law expectation of a clarificatory circular on the same Documentation for each step in a transaction / structure stating the intent of the parties to be clearly captured Need for supplement documentation with expert reports, legal opinions etc Need to bring out substance as much as possible to mitigate the GAAR exposure Preparedness for GAAR to begin now

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GAAR THE BMR APPROACH

BMR THOUGHT LEADERSHIP

Please refer the following links for BMR papers on GAAR GAAR impact on cross-border structuring SAAR to GAAR Impact on domestic structures and transactions Business Standard: A reform approach to the policy debate
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Business World: A Strong Case for GAAR Financial Express: Draft GAAR guidelines step in right direction?

In case of any query, please write to us at corporatecommunication@bmradvisors.com

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Mukesh Butani
Mukesh is Chairman, an Of counsel to the firm and Managing Partner of BMR Legal. With a specialisation in international tax and transfer pricing, he has over 25 years experience in advising Fortune 500 multinationals and Indian business houses on a wide range of matters relating to cross-border tax structuring, tax controversy and tax policy. A former national tax Director and international tax Partner at two Big Four firms, Mukesh currently serves as a member of the board of Taxand, the worlds largest independent tax organisation, and as Vice Chairman of the International Chamber of Commerce Commission on Taxation. He was recently inducted as member of the Advisory Group on International Tax and Transfer Pricing constituted by the Indian Ministry of Finance. He is also a member of the OECD Business Restructuring Advisory Group. Mukesh is an acclaimed expert on international tax and transfer pricing and has a number of authorships to his credit including works published by LexisNexis Butterworths and most recently, a treatise on Dispute Resolution for the Cambridge University Press. His other authorships include the Wolters Kluwer CCH online guide to Transfer Pricing in Asia and titles on Business Restructurings and Customs Valuation, coauthored for the International Bureau of Fiscal Documentation (IBFD). Mukesh participated in the Kelkar task force tax reforms and was a member of the Indian Governments committee on e-commerce taxation. He is presently representing ICC in the Standing Committee on withholding tax. Mukesh has consistently featured among the leading international tax and transfer pricing advisors in independent surveys, most notably the International Tax Review, Legal Media expert guide, Asia Law Leading Lawyers, Chambers & Partners and Legal Whos Who of Corporate Tax Lawyers.

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Gokul Chaudhri
Gokul is a tax Partner with BMR Advisors, leading the direct tax practice of the firm. He has over 20 years experience in tax matters with a focus on the energy sector. Prior to joining BMR Advisors at its founding in November 04, Gokul was the leader of the Energy, Chemicals and Mining industry and member of the Oil & Gas industry team at a Big 4 firm. His professional service experience includes significant engagements for domestic and international clients, including multi-billion dollar cross border transactions, privatization initiatives and project advisory for large infrastructure assets. In addition, he has extensive experience in structuring and presenting (possibly over 400 in number) in-bound foreign investment proposals to the Government of India. In the early years of the liberalization in India, he was the joint leader for the engagement commissioned by the Ministry of Industry and Commerce for benchmarking concerns and challenges faced by foreign investors in India. Over the past decade, Gokul has been an active speaker at domestic and international seminars. He is a member of the Institute of Petroleum (now The Energy Institute, London) and Federation of Indian Mineral Industries. He is the Chairman of the Energy committee of PHD Chambers of Commerce and Industry . He has been a participant and speaker at the investment road shows held in Europe by the Government of India and was also invited in 2006 by the business forum of the European Commission to speak at Brussels on the reform process in India. Gokul has been involved in fiscal reform initiatives by the Government of India, and was a member of the task force on tax reforms for the mining industry. He is currently a member of the executive council of International Fiscal Association North India. He also served as a member of the finance sub group for road map for Clean Development Mechanism under the National Action Plan for Climate Change, and technical group for guidance on accounting of carbon credits constituted by the Institute of Chartered Accountants of India. Gokul is a graduate in Commerce from the University of Mumbai and qualified as a Chartered Accountant in 1994.

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Shefali Goradia
Shefali is a Partner with the firms corporate tax practice in Mumbai. With a specialisation in cross border taxation, she has over 20 years of experience in international tax. Shefali is extensively involved in advising multinational corporations on a range of issues in designing global holding and operating structures, structuring inbound and outbound investments, cross border mergers, acquisitions and other corporate reorganizations. She is also involved in developing and implementing domestic and international fund structures for leading investment and private equity fund houses. In addition, her work covers advice to several pharmaceutical companies, and software and e-commerce companies in the IT industry. Within the financial services industry, she advises banks in designing structured finance products and works with several fund houses and asset management companies. Shefali has most recently been conferred as one of Asias pre-eminent lawyers for taxation in the Asia Law Leading Lawyers Survey 2011 and has featured in the Legal Whos Who of Corporate Tax Lawyers and The Private Funds Lawyers for the third consecutive year in 2011. She is a regular writer and lecturer on international tax topics and has contributed to the India chapter on Is there a Permanent Establishment? for the 63rd IFA Congress in Vancouver, 2009. She is also a member of the core group on International Tax of the Bombay Chartered Accountants Society. Shefali is a graduate in Commerce from the University of Mumbai and qualified as a Chartered Accountant in 1991.

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Disclaimer: This presentation has been prepared for clients and Firm personnel only. It provides general information and guidance as on date of preparation and does not express views or expert opinions of BMR Advisors. The presentation is meant for general guidance and no responsibility for loss arising to any person acting or refraining from acting as a result of any material contained in this presentation will be accepted by BMR Advisors. It is recommended that professional advice be sought based on the specific facts and circumstances. This presentation does not substitute the need to refer to the original pronouncements

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