Tax has remained a key component in mergers and acquisitions, with the tax structuring largely driven by the need to reduce cost and improve returns. In the backdrop of greater scrutiny by tax authorities, the focus is on ensuring ‘tax’ does not become a deal breaker.
In the light of GAAR and the taxation of indirect transfers — a la Vodafone, M&A tax witnessed some hits and more misses in 2013. Most frustrating was the lack of clarity on the retrospective amendments for ‘indirect transfers’. The Shome Committee recommendations were widely expected to figure in Finance Bill 2013, but there was not even a fleeting mention.
The introduction of tax on buyback of shares by an unlisted Indian company has hampered cash repatriation, especially by unlisted MNC subsidiaries. Welcome moves include the removal of the cascading effect of dividend distribution tax on dividend received from a foreign subsidiary and a one-year extension of the concessional tax rate of 15 per cent for dividends received from specified foreign companies. Taxpayers claiming depreciation on goodwill, based on the Apex Court’s decision in the Smifs Securities case, heaved a sigh of relief as it continues to be in force.
Some of the judicial pronouncements in 2013 have reconfirmed that tax authorities are going beyond conventional approaches in assessing taxpayers.
The Punjab and Haryana High Court ruled in Sumeet Taneja’s case that transfer of shares was transfer of business, which resulted in business income. Typically, a strategic share transfer deal would have covenants similar to those listed in the ruling and could thus increase litigation between taxpayers and authorities.
Shell India’s controversy again caught global attention. Tax authorities challenged the valuation methodology for issue of shares and made transfer pricing adjustment, imputing interest on alleged receivables from Shell Gas BV. Further, the authorities re-characterised the notional premium as taxable income in the hands of Shell India. The tax impact being significant, Shell India has filed a writ before Bombay HC. Similar action was taken against Vodafone India.
Aditya Birla group received notice for a huge tax demand over the demerger of assets and licences between Idea Cellular and its step-down subsidiary, labelling the transfer of assets and licence as a “slump sale” resulting in capital gains tax.
Another noteworthy case is Kodak India, which sold its medical imaging business to Carestream India. Even though the transaction was between two Indian entities, the transfer pricing officer proceeded to determine the arm’s length price on the premise that the sale was an international transaction pursuant to a global transaction between Kodak and Carestream. It is interesting to note that the sale agreement for India was not linked to the global agreement. Bringing relief to Kodak, the Mumbai Income Tax Appellate Authority ruled in its favour.
While the Mauritius-related uncertainty continues, there was some good news in Finance Bill 2013 when the Finance Minister clarified that the tax residency certificate will be accepted as proof of residency and the CBDT circular related to Mauritius shall be valid. Recently, according to news related to the India-Mauritius tax treaty re-negotiation, the two countries agreed to insert a Limitation of Benefit clause (exact modalities yet to be finalised), which would restrict benefits including capital gains to entities having substance in Mauritius.
The CBDT recently notified Cyprus as a non-cooperative jurisdiction for failure to provide information. Taxpayers dealing with persons located in Cyprus are reviewing the impact of this administrative move on their transactions/ business structures. Non-compliance with specified procedures may entail onerous consequences.
Under the new company law, not fully operational though, there are various changes related to corporate reorganisations. These include, inter alia, inbound/ outbound mergers, merger of specified companies without court approval, and change in the definition of ‘subsidiary’. As these may have their own tax implications, hopefully we would see some constructive amendments in income-tax law in 2014.
Given the backdrop of political uncertainty, hopes for the new year include greater clarity on certain tax provisions related to M&A, accompanied by lucid examples of tax authorities’ interpretation as well as a farewell to retrospective amendments. Further, the implementation of Shome Committee recommendations on ‘indirect transfers’ will also impact M&A deals positively. The fervent desire for 2014 is that the tax regime, if not a dealmaker, should at least not be a deal breaker!
Mehul Bheda, Executive Director — Transaction Tax, contributed to the article
The author is Partner and National Leader — Transaction Tax, EY