Unified tax structure brings synergy in the company

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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.