The 2008 global meltdown led to the genesis of the Base Erosion and Profit Shifting (BEPS) project, which continues to re-shape the world of taxation and governments’ response to tax structures and business transactions. BEPS could also significantly impact mergers and acquisitions.

The acquisition structuring, often through an intermediary holding company in a tax-friendly jurisdiction, necessitates careful analysis of current tax laws and also the likely changes to be brought in by one or more tax jurisdictions. According to Action 6 of BEPS, Preventing the Granting of Treaty Benefits in Inappropriate Circumstances, there is lot of thrust towards introducing the anti-abuse provisions in tax treaties through the Limitation of Benefit and Principal Purposes Test rules. Interestingly, India revised its treaty with Mauritius recently and is re-negotiating treaties with Cyprus, Belgium, Singapore, etc.

The type of legal entity and the financing options may also undergo a change, due to Action 2, Neutralising the Effects of Hybrid Mismatch Arrangements, and Action 4, Limiting the Base Erosion Involving Interest Deductions and Other Financial Payments. Hybrid structures and structures with huge interest payments may come under the scanner.

Due diligence exercise, an integral part of the M&A process, shall become more rigorous, and complex. Given the active support from the OECD, G20 and now groups on BEPS, changes in tax treaties coupled with domestic tax laws are becoming a new norm. Thus, existing structures, business models and past transactions need to be evaluated not only from the current tax law perspective but also from what the future holds in store since any change in tax laws could also impact past transactions. The case in point here is the retrospective tax on indirect transfer of shares/assets India had introduced. The introduction of anti-abuse rules in India — GAAR — from 1 April 2017, is likely to pose new challenges vis-à-vis the transaction structures.

Additionally, India has introduced the Place of Effective Management rules to determine residential status, which to a certain extent ushers in the Controlled Foreign Company regime in the country. There is a specific recommendation in the BEPS report under Action 3, Designing Effective CFC rules. These could impact Indian outbound investments and need to be carefully evaluated for existing and future investments.

A key area of dispute in international tax is whether a foreign entity has a Permanent Establishment (PE) or not in another tax jurisdiction. The tax implications vary considerably and could alter the bottom line significantly. Action 7, preventing the Artificial Avoidance of Permanent Establishment, recommends that artificial structures such as commissionaire arrangements and similar strategies, preparatory and auxiliary business activity vs main business activity, etc. need to be evaluated and issues addressed. Many countries including India, have enabling rules for revenue authorities to evaluate transactions dating back to many years. Thus, these factors need to be built in the business valuations and commercial negotiations in M&A transactions.

With the world becoming a globally e-connected village, any action taken by revenue authorities in one country, can lead to repercussions in other countries. Hence, the M&A landscape is likely to undergo significant changes given the evolving tax regimes.

The writer is Partner, Tax, KPMG India. The views are personal

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