Glaceau deal: Tatas can save Rs700cr tax

A smart deal structure might result in the Tata group incurring limited or no tax liability in India on its 30 per cent stake sale in American beverages company Glaceau.

Last Friday, Tata Tea announced that it had decided to sell the Tata group's 30 per cent stake in Energy Brands to global beverage giant Coca-Cola for $1.2 billion.

Tax experts say the group could save close to Rs 700 crore of tax liabilities in India as it acquired the stake in Glaceau through Tata Tea GB.

Because of this deal structure, the Tatas could avoid double taxation on any dividends or capital gains repatriated from the US. Tata Tea GB is a 100 per cent subsidiary of Tata Tea and was set up as a special purpose vehicle in March 2000 to acquire UK tea giant Tetley.

Tata Tea and its holding company Tata Sons partly financed the Glaceau deal with an equity infusion of $192 million and $58 million, respectively.

The balance $427 million was debt financed by Tata Tea GB. The Tatas could also claim a tax shield on the interest paid on debt to finance the Glaceau acquisition.

In contrast, had the acquisition been done through parent company Tata Tea, which is listed in India, it would have had to pay income tax in India at the current corporate tax rate of 34 per cent.

Considering that the Tatas made a profit of $523 million (Rs 2,122.85 crore at prevailing exchange rates) on the stake sale, it would have resulted in a tax outgo of $156.9 million (Rs 636.85 crore, according to the exchange rate on the day of the announcement).

However, it is not that the Tatas will escape the tax net completely. Experts point out that with a corporate tax rate of 35 per cent, the US has the second highest tax rate globally. In this case, Tata Tea would end up paying $183.05 million (Rs 838.36 crore) in taxes.

According to Indian tax laws, an acquisition or sale made by an overseas subsidiary of an Indian company is not liable for taxation in India.

If the acquisition is made by an Indian company, it would be required to pay capital gains tax at 22.66 per cent if the investment is for more than 12 months. In this case, as the investment was for about nine months, the Tatas would have been liable to pay income tax at 33.99 per cent.