FIRST DRAFT

DIRECT TAX

SUBMITTED BY SUBMITTED TO

SIDDHARTH PANDEY Mr. RAHUL HEMRAJANI

BA0140061 (FACULTY)

RESEARCH TITLE

“TAX IMPLICATIONS ON CROSS BORDER MERGERS AND ACQUISITIONS-INDIAN

PERSPECTIVE”

INTRODUCTION

Mergers and acquisitions play a major role in the globalization process. Tax laws should better
accommodate cross border merger and acquisitions. In an endeavour to geographically expand
the utilization of their competitive advantages, merger and acquisitions allow the firms to do so
in a fast, effective and perhaps in an inexpensive manner. Many countries have some tax rules
that grant certain benefits to merger and acquisitions transactions, usually allowing some deferral
of the tax otherwise imposed on the owners of some of the participating parties upon the
transaction. On the other hand, once mergers and acquisitions transactions cross borders,
countries are much less enthusiastic to provide tax benefits to the involved parties, understanding
that, in some cases, relief of current taxation practically means exemption since such countries
may completely lose jurisdiction to tax the transaction. Cross-border merger and acquisitions,
although presenting many of the same issues as domestic deals, are usually more complex and
rife with surprises and other pitfalls, more so when the number of geographies involved in the
transaction increases. The sheer range of concerns has expanded as the speed and volume of
international deals have increased. Domestic merger and acquisitions are, generally and on
average, socially desirable transactions. In many countries, they enjoy tax preferences, but only
to the extent to which they use stock to compensate target corporations or their shareholders. The
legal framework for business consolidations in India consists of numerous statutory provisions
for tax concessions and tax neutrality for certain kinds of reorganizations and consolidations.
With India rapidly globalising, and the economy growing and showing positive results, a sound
tax policy is essential in this regard. Tax is an important business cost to be considered while
taking any business decision, particularly when competing with other global players.

The Indian Income Tax Act, 1961(ITA) contains several provisions that deal with the taxation of
different categories of mergers and acquisitions. In the Indian context, M&A can be structured in
different ways and the tax implications vary based on the structure that has been adopted for a
particular acquisition.

Income generated overseas could be send back to the Indian Company in the form of interest,
royalties, service or management fees, dividends, capital gains. Such income when repatriated to
the Indian Company by the International Holding Company (IHC) or to the IHC by the target
company would attract double taxation.

Tax issues arise in cross border deals when two different jurisdictions seek to tax the same sum
of money or income or the same legal person thereby resulting in double-taxation. Many
countries are aware that double taxation acts as a disincentive for engaging in any cross border
trade or activity. Therefore with the primary view to encourage mutual cooperation, trade and
investment, the countries enter into bilateral Double Taxation Avoidance Agreements (DTAA) to
limit their taxing jurisdictions voluntarily through self-restraint.

Through the Finance Act, 2012, the Indian legislature had introduced “indirect transfer
provisions”. These provisions require that gains arising from the transfer of shares of a
company incorporated outside India would be taxable in India if such shares substantially
derive their value from assets located in India. The introduction of these provisions in the ITA
has been widely debated by various participants of the Indian economy. The provisions were
introduced after the Supreme Court’s decision in the Vodafone’s case. Consequently in 2012,
the Indian legislature amended Section 9(1) (i) of ITA by adding an additional explanation
clarifying that an offshore capital asset would be considered to the place to which for purposes
of legal jurisdiction or taxation a property belongs to India or if it substantially derives its
value whether directly or indirectly from assets situated in India after the 2012 Amendment.

SCOPE AND OBJECTIVE

The scope of this paper is to examine tax laws that govern the cross border deals involving India
which has been a debate on taxation issues has led to a few amendments by virtue of the Finance
Act, 2008 and later in 2012.

RESEARCH QUESTION
 Whether a non-resident seller is liable to tax in India on sale of shares of the foreign
company?

Regulatory Laws

The relevant laws that are to be implicated in a cross border mergers

and acquisitions in India are as under:
 Companies Act, 1956: Cross border M&A, both the amalgamating company or
companies and the amalgamated (i.e. survivor) company are required to comply with the
requirements specified in Section 391-394 of the Companies Act, which, inter alia,
require the approval of a High court and of the Central government. Section 394 and
394A of the Act set forth the powers of the High Court and provide for the court to give
notice to the Central Government in connection with amalgamation of companies.
 Foreign Exchange Laws: The Foreign Direct Investment Policy of India needs to be
followed when any foreign company acquires an Indian company. FDI is completely
prohibited in certain sectors such as gambling and betting, lottery business, atomic
energy, retail trading and agricultural or plantation activities. The Foreign Investment
policy of Government of India along with the press notes and clarificatory circulars
issued by the department of investment policy and promotion, Foreign Exchange
Management Act, 1999 (FEMA) and regulations made there under, including circulars
and notifications issued by the RBI from time to time, the Securities and Exchange Board
of India Act, 1992 and regulations made there under (SEBI laws).
  Income Tax Act, 1961: A number of important issues arise in structuring a cross-border
merger and acquisitions deal to ensure that tax liabilities and cost will be minimized for
the acquiring company. The first step is to explore leveraging local country operations for
cash management and repatriation advantages. Moreover, the companies should be
looking at the availability of asset-basis set up structures for tax purposes and keeping a
keen eye on valuable tax attributes in merger and acquisitions targets, including net
operating losses, foreign tax credits and tax holidays. As per the provisions of the Income
Tax Act, capital gains tax would be levied on such transactions when capital assets are
transferred. From the definition of transfer, it is clear that if merger, amalgamation,
demerger or any sort of restructuring results in transfer of capital asset, it would lead to a
taxable event. As far as merger and acquisitions are concerned, the provisions of Indian
Income Tax Act, 1961 with respect to amalgamation1, demerger2, securities transaction
tax (STT), capital gains, slump sale, set off and carry forward of losses, etc. need to be
examined intricately to establish legitimate safeguards.

BIBLIOGRAPHY

PRIMARY SOURCES

Statutes reffered

 The Indian Income Tax Act, 1961

 Finance Act, 2008
 Finance Act, 2012

SECONDARY SOURCES

Articles reffered

 Taxation of Cross Border Mergers and Acquisitions, 2010 Edition, KPMG United States
available, at

1
section 2(1B)
2
section 2(19AA)
 http://kpmg.com/Global/en/IssuesAndInsights/ArticlesPublications/Documents/Tax-MA-
2010/MA_Cross-Border_2010_India.pdf
 Cross Border Business Reorganization: Indian Law Implications, Aniket Singhania &
Vaibhav Shukla, available at, www.itatonline.org

 K.R.Girish and Himanshu Patel, KPMG, ‘Deals: India wants more taxes from cross-
border M&A’, February 19, 2008, International Tax Review, available at,
www.tpweek.com/articles/why-foreign-institutional-investors...not...tax/arvogkym

 Gupta, Sayantan, Cross-Border Mergers and Acquisitions: Addressing the Taxation

Issues from an Indian Perspective (December 4, 2008). Corporate Professionals Today,
CPT, Vol. 13. No. 6, p. 525, 2008. Available at,
SSRN: https://ssrn.com/abstract=1311102