Friday, April 30, 2010

Law Street - Economic Times (April 2010) - Overseas acquisitions

Dear Readers,

The days are getting warmer, the sun beats down mercilessly, this prompts Zenobia Aunty to stay indoors, even as she dreams of a visit to Iceland (volcanic eruptions, notwithstanding). But it seems that India Inc is truly leaving its footprints behind on foreign soil. Tax laws, if amended with this growing need in mind, could really put India Inc on the global map. To read more, click here.

In case, you can't access the above link, or the summer heat is making you lazy, the article is also pasted below. Have a nice weekend.

Best regards,

Source of the photograph

Globetrotting anew
Overseas M&As must be encouraged
Reforms for overseas M&As must be progressive
Singapore has introduced a M&A write-off
Travel writer, Pico Iyer is known to have said: “…Travel for me is an act of discovery and of responsibility as well a grand adventure and a constant liberation.” India Inc which is once again confidently striding overseas and engaging not only in setting up shop overseas but boldly acquiring companies overseas would no doubt agree.

After all, in a flat world and one which is only getting flatter, inorganic growth, especially cross-border growth is essential to emerge as a leader or at least find a firm footing on the global map. We do have astute business leaders who are willing to embark on the overseas expansion road trip, keeping in view their stakeholder’s interests. However, the much desired change in regulations to spur outbound growth remains largely elusive.

Indian Companies are expanding their operations worldwide – either through acquisitions or by setting-up new companies. A corresponding trend that has emerged is that more and more Indian companies use their overseas subsidiaries to hold offshore investments. One of the principal reasons in doing so is that repatriating funds to India is extremely inefficient from a taxation point of view – foreign dividends when received by the Indian investor company in India are taxed at the normal corporate rate (current of 30%) plus applicable surcharge and cess.

In addition there is economic double taxation, because Indian companies are taxed on dividends received from its overseas subsidiaries without receiving any credit for foreign taxes that were paid by the dividend paying subsidiary (only a few tax treaties entered into by India, such as those with Mauritius and Singapore provide for underlying tax credit). Developed tax regimes avoid this issue through either providing a tax credit for foreign taxes or by totally exempting the dividend from tax in the recipient jurisdiction. For instance, UK and Japan last year, introduced legislative changes whereby dividend income received from an overseas subsidiary is not taxed.

In fact, globally there are constant developments in the realm of taxation, to encourage outbound growth. Zenobia Aunt’s Singapore attorney friend provided some interesting details. He dropped in last weekend to meet Zenobia Aunty who is currently recuperating and is housebound.
While he was sipping a cup of Darjeeling tea, he happened to look at this paper and the headlines relating to an overseas acquisition. This sparked off a debate on whether India was really friendly to its overseas investors (domestic companies investing overseas). Our friend, the Singapore attorney, felt India still had a lot to do to catch up.

Jet lagged, he wasn’t at this diplomatic best. “The Bandra-Worli sea-link, isn’t enough”, he quipped. This invited glares from all of us and a growl from Spot. Zenobia Aunty was more realistic. While she acknowledges the liberalisation reforms carried out, she still thinks that there is a lot more we can do, or rather must do.
Singapore recently announced its budget proposals which contain some interesting features. A merger and acquisition (M&A) allowance will be available in respect of transactions that qualify during the five year period commencing from April 1, 2010. The quantum of the M&A allowance is 5 per cent of the value of the acquisition
subject to a cap of Singapore dollars 5 million. This M&A allowance is to be written off by the Singapore company equally over a five year period. Further stamp duties on transfer of unlisted shares in respect of such qualified M&As will also be remitted subject to the stipulated caps.

The Singapore government has recognised that M&As are a necessary tool for strategic growth and globalisation. The M&A allowance, in the form of a tax write-off helps defray a portion of the costs of acquisitions. It is simple, because it does not distinguish between interest costs and other costs and hence is neutral between debt and equity financing in the M&A deal.

Zenobia Aunty is quick to point out that the RBI has over the years liberalised the provisions relating to outbound investments. The overall limit for outbound investments by Indian companies now stands at 400 per cent of its net-worth. However, our tax laws have not been as progressive.

While anti-avoidance provisions are sure to be introduced when the Direct Tax Code (DTC) comes into play, progressive tax laws must not be ignored. Perhaps a cue can be taken from Singapore, and also from Japan and UK, which have now exempt foreign dividends repatriated back to the home country. And if we could introduce an M&A write-off, nothing like it.

Recent statistics released by ‘Business Monitor International’ show that the outbound foreign direct investment as a percentage of GDP in developed countries is 33 per cent. In the BRIC countries it is as follows: Russia (20 per cent); Brazil (10 per cent), China (3 per cent) and India (2.6 per cent). For India to catch up, supportive domestic legislations, especially on the tax front hold the key.

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