coporate amalgamation etc

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PricewaterhouseCoopers October 8, 2005Page 1

CorporateRestructuring


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Commercial Factors Affecting Cross Border Investment

Common reasons

Location of customers

Quality and location of workforce

Entering new markets

Economic environment

Potential issues

Regulatory issues

Taxation matters


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D eveloping the tax strategy - Possible requirements

Dividends from abroad tax free

Capital gains on the sale of foreign shareholdings

Capital gains on the sale of domestic shareholdings

No further taxation on domestic dividend incomeFinancing costs deductible

Ratio of shareholder debt and equity

Exemption of foreign branch profits and deductibility of foreignbranch losses


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D eveloping the tax strategy - Possible requirements(continued)

Wide treaty network with low or reduced WHT

EU membership

Group taxation

Unlimited loss carry forward

Capital duties

Stamp duties

Low social security taxes

Sales taxes


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D eveloping the tax strategy Core considerations

Pooling of dividends and cash

Tax efficient borrowing/lending

Tax efficient royalty flows

Capital gains tax exemptionsMinimise withholding taxes

Review of business models

Reduction in global tax rate


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Business model

Multi-national Regional/entrepreneur Inverted

Taxburden

Finance & debtrelated strategies

Profit migration & e businessrelated strategies

Emigration &related strategies

Best in class structures


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Parent

InternationalHolding

Company

Local HoldCo 1

Local OpCo 1

Local HoldCo 2

Local OpCo 2

Tax efficientfinance vehicle

Country 1 Country 2

Shareholders O bservations

Discrete operations in specific countries

Debt pushdown to minimise foreign tax

Tax efficient lending creates low tax profit

IHC to manage CFC and deferral

Foundation structure: Traditional multinational


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Best in class structures: Regional/Entrepreneur structure

Parent Company

Holding Company

Manufacturer/Developer Sales Agent

PrincipalEntrepreneur

Suppliers

Customers

O bservations

Centralised functions and services

Regional/global operations

E-procurement and e-sales

Minimise profits in high tax operations

Maximise profit in low tax entrepreneur Activities of entrepreneur address CFC

position (if any)


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Can we apply this thinking to India?

Indias System in outline

Relief for withholding taxes on royalties, interest anddividend income

No relief for underlying tax credits on dividends repatriated fromoverseas subsidiaries leading to double taxation on profits

Indian tax on Capital Gains on disposal of subsidiary holdings No controlled foreign corporation regime

Answer Possibly


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Close

Taxation and market forces often dictate a structure for

multinationals

There are constant changes in the regulatory and

taxation fields which impact on desirable structures

There are considerable opportunities for Indian companies venturing

abroad

A definite need to constantly monitor the corporate structure


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P ri t r r O t b r 8, 2005Pa g 12

Restructuring

D emerger /Spin off Asset purchase

Stocksale

Restructuring

Mergers/Amalgamation


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Merger of one or more company into another or merger of companies to formanother company provided 75% in value of the shareholders of amalgamating company must become

shareholders of the amalgamated company (Sec 2(1B))

Amalgamation - Direct tax neutralized

No income to amalgamating company/shareholders on the transfer of businessundertaking/receipt of income. (Sec 47(vi))

Depreciation to amalgamated company on the basis of tax w.d.v in the hands of the amalgamating company (Explanation 7 to Sec 43)

Accumulated losses and unabsorbed depreciation of amalgamating company canbe carried forward by the amalgamated company if specified conditions arefulfilled. (Sec 72A)

Amalgamation

Shareholder X

Cement Unit

Company X Ltd..

Shareholder Y

Cement Unit

Company Y Ltd..

Shareholders X & Y

Cement Unit

Company XY Ltd.


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D emerger

Promoter - 40% Public - 60%

Company( D C)


Cement Unit Steel Unit

Tr ansfe r of business unde r taking as a going conce r n by one company (DC) toanothe r company (RC) pu r suant to a cou r t Scheme subject to fulfillment of following conditions (Section 2(19AA) )

All properties and liabilities of the business undertaking are transferred atbook values ;

Shares of the RC are issued to the shareholders of the DC on a proportionatebasis;

Shareholders holding not less than 75% in value of the shares of the DCbecome shareholders of the RC;

Cement Unit Steel Unit

Company(RC)Company ( D C)


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Tr ansfe r of business unde r taking as a going conce r n fo r lump sum conside r ationwithout values being assigned to individual assets and liabilities.(Section 2(42C)

Transferor Company

Transferor Company liable to short/long term capital gains (holding period 36months) (Section 50B)

Capital gains computed by deducting net worth from the sale considerationStep up of Depreciation - possible as transferee entitled to depreciation on the costof assets. (Section 32 & 72) Valuation of assets r equi r ed

Asset purchase


Company X Ltd..


Cement Unit Steel UnitCement Unit Steel Unit

Company X Ltd..

Y Ltd..


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Liable to long term capital gains depending on the period of holding (holding

period 12 months)

In case of shares listed on a recognised stock exchange in India

Subject to securities transaction tax instead of Capital gains tax Deduction under section 88E of STT available if income under PGBP'

includes any income from taxable securities transactions

Stock Sale


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Tax issues MappedFor Transferor

Carry forward of loss/ depreciation

Capital gains tax. Transfer pricing. Tax avoidance

device Business closure Diversion of income

at source. Depreciation. Tax impact of

alternate funding. Staggered

consideration. Capital receipt. Allocation of

common assets /liabilities.

For Transferee Carry forward of loss Production / asset

holding criteria. Depreciation on tangible

/ intangibles. Tax credit under MAT. Deduction for 43B

liabilities.

Deduction for liabilitiesof predecessor /remission of liabilities.

Cost of acquisition / fair market value.

Continuity of taxexemptions /deductions.

Restatement of value. Succession of business

tax liabilities

For Shareholders

Deemed dividend Capital gain / loss Consideration in kind /staggered consideration.

Short term / long term capitalassets

Cost of acquisition Transfer pricing Treaty protection Foreign tax credit Underlying tax credit Tax sparing on exemptincome

Tax avoidance


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Reduce Dividend distribution tax Opportunities to utilize losses. Step up of tax depreciation base. Reduced administrative cost. Transfer pricing asymmetry. Flexibility of allocating common expenses. Impact on quantification of tax incentives. Possibility of depreciation on intangibles Mitigation of minimum alternate tax. Impact on tax incentive of change in holding / migration of business. Tax optimization by alternate funding methods.

Long term tax O bjectives


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