Cross-border deals under I-T scanner

Objective of the examination is to study the tax implications of such deals.

Income tax authorities are closely examining the tax implications of recent cross-border deals struck by Indian companies.

Prominent among the deals is the Tata group's acquisition of a 30 per cent stake in the US-based Glaceau through its UK-based subsidiary, Tata Tea GB. Tata Tea has since agreed to sell the stake to Coca-Cola for around $1.2 billion.

Other deals that the tax department is looking into are Telekom Malaysia and Maxis's acquisition of some stake in Chennai-based Aircel, the Hutch Essar-Vodafone deal and the sale of 9.27 per cent stake of Slac Mauritius Holdings in HDFC to Citibank in 2006.

The tax department is also closely looking at a host of wholly owned subsidiaries set up by pharmaceutical companies overseas for facilitating cross border acquisitions over the last two-three years.

According to sources close to the development, the objective of the examination is to study the tax implications of such structures.

It has been observed that most companies with international presence have been routing their overseas acquisitions though their overseas offices or subsidiaries to avoid paying taxes in India.

Experts said that this brings up the issue of source and resident taxation. This means that cross-border investment may be taxed where the income is earned (source country ) or where the person who receives it is normally based in (the country of residence).

"What is taxable in India is transfer of shares in an Indian company. Share transactions do not result in change of legal ownership of an Indian company. Authorities are alleging that there is a transfer of beneficial ownership and therefore capital gains arising out of it should be taxed in India. They are trying to lift the corporate veil, which is fine if there are issues related to corporate laws. Since there is no provision for taxing beneficial ownership, what is being looked at is outside the provision of framework of law," said Mukesh Bhutani, partner, BMR and Associates.

Resident taxation is based on the principle that people and firms should contribute towards the well-being of the country where they live, on all their income wherever it comes from.

Source taxation is justified by the view that the country that provides the opportunity to generate income should have the right to tax it, a tax expert said.

He added that India follows a combination of source and resident taxation. If an Indian company invests outside India in its own name, the branch income is taxable in India.

But if an Indian company sets up a subsidiary overseas, which in turn forms subsidiaries for international operations, the income accruing to the first subsidiary is not taxable in India as the income does not come to India.

Sources said that even though there are international norms for allocating the rights of taxation, it becomes difficult to demarcate the areas in case of transnational companies.

Most of these companies set up a network of intermediary subsidiary companies to manage the financial inflows and bring back inflows to the parent company only when it is required to fund dividends to shareholders.