Unified tax structure brings synergy in the company

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Today's environment is characterised by signi- ficant cross-border investments and transactions by Indian companies. As Indian businesses become more complex with the global nature of operations, so do tax planning and compliance. This necessitates a comprehensive tax strategy that is aligned with the operations and seeks to achieve a lower worldwide effective tax rate within an acceptable risk matrix.

Overseas acquisitions would result in multiple entities in the group carrying multiple functions across various jurisdictions. Taking a simplistic example, let’s suppose that there is an Indian company engaged in a manufacturing business, having a customer base within and outside India. The company has developed a considerable amount of expertise in its business over a period of time and is recognised as one of the pioneers in its field. To acquire new capabilities, it has made acquisitions and has subsidiaries in the US, the UK, France and Germany, engaged in activities like manufacturing, distribution and R&D and having various customer relationships amongst themselves. Thus, after these acquisitions, the group has various capabilities within and outside India.

Undoubtedly, a coordinated working amongst these entities will enable the group to achieve synergies. In this situation, it would be important to examine what would be the distribution of functions and risks amongst the group entities, who will do what, who would enter into customer contracts, how would these be structured, and whether certain key functions, assets and risks should be centralised in a particular jurisdiction to achieve a better coordination, control and management.

Certain issues to be considered would be as follows:

* Whether all the IP in the group should be centralised in a particular jurisdiction for better management and control?

* Whether the overall control and management including all the key strategic functions, say for the European operations, should be centralised in a particular jurisdiction?

* Whether shared service centres should be established to service al l entities for common processes?

* How can various entities leverage from the best practices of each other?

* Should there be a movement of key personnel to centralise such functions in a particular jurisdiction?

* Whether any entity in the group, which was a full-fledged manufacturer earlier, should now be a contract manufacturer for better management and control and how can this be achieved? Should the distribution activities be similarly restructured?

From a commercial perspective, if the need for a different business model were felt in light of the expanded overseas presence, then one would need to take cognizance of the costs involved, one of these clearly being tax cost. An ideal business model would be one that is based on the foundation of economic substance, and which in the process, minimises tax costs for the group. A tax efficient business model would seek to identify ‘portable profits’ within the group and would seek to migrate these legally, within an acceptable risk matrix, to a lower tax jurisdiction. Here, transfer pricing principles come into play. Obviously, greater the functions, assets and risks, greater would be the attribution of profits. Therefore, a mapping of the functions performed, assets employed and risks assumed within various entities within the group becomes essential. Such an analysis, which is an intensive exercise, will enable an identification of which functions, assets and risks that can be migrated, what is their worth, which entity will do what in the restructured business model, and what kind of a transfer pricing policy needs to be put in place, which can achieve a lower global effective tax rate.

It is worthwhile to note that any such business model has multifarious tax implications. For example, matters such as creation of a permanent establishment, tax withholding implications, tax credits, tax on profit repatriation and also service tax implications would need to be considered.

Migration of functions and assets could have capital gains tax implications as well, which need to be factored. A conversion from a full-fledged manufacturer to a contract manufacturer can result in transfer of say, process intangibles.

Therefore, an analysis of whether such a transfer has actually taken place, needs to be made, since a change of functions need not result in transfer of intangibles in all cases. A relevant issue would also be what would be the arms length compensation, if any, for transfer of functions. For example, if certain key personnel from the

Indian entity were to relocate to say, the regional headquarters for the European business, then what would be the arms length compensation for the Indian entity?

Any such restructuring should be based on the foundation of economic substance and should exist in practice and not just on paper. This will ensure that the business model is aligned with the operations and has tax benefits that are lasting and defensible.