How is globalisation affecting India's investment cos?

By Menaka Doshi, CNBC-TV18

All the gyan on how the world is flat and globalisation means that India will be impacted by all kinds of international events. It’s true more so in the case where an international precedent can influence the Indian interpretation.

In 1995, British Company Volvo and UK-based Henley Group acquired Canadian car manufacturer Prevost via an investment company set up in the Netherlands. Why the Netherlands? That’s because of the lower Dutch-Canadian withholding tax rate of 6% compared to a Swedish-Canadian rate of 15% and a British-Canadian rate of 10%. But the deal ended up in court raising an often-asked question.  

Porus Kaka, Tax Counsel said, "When you set-up an investment company consisting of one or maybe two shareholders- can that investment company be granted treaty benefit or is the ultimate shareholder to get the treaty benefit interpreting the word beneficially owned. There were conflicting views from the French Supreme Court and the UK Court and the Canada Tax Court has finally has resolved the issue correctly. History behind this provision indicates the treaty benefit should not be given to agents or nominees. The Court is held an Investment Company cannot be treated as an agent nominee. Therefore rejected the Minister’s argument in Canada that is anyway an Investment Company set up in Netherlands of two UK and Swedish shareholders cannot get benefits of the Netherlands Treaty." 

How is India impacted? Every single treaty that India has signed uses the term beneficially owned in the context of dividend income, royalty income and interest income. Therefore interpreting this word, this decision would be extremely persuasive and useful.

Sudhir Kapadia, Head- Tax and Regulatory Services, KPMG says, "There is an interesting international tax controversy, which has cropped up in recent times. This is relating to a jurisdiction in Switzerland called Liechtenstein. Very interestingly since the days of World War II, many rich German Nationals have thought it fit to reinforce some of their wealth and their incomes in jurisdiction like Liechtenstein and other jurisdictions in country like Switzerland. From a political stability point of view, of course, the incentive is to avoid the very high personal rates of tax, which was seen in post world war Germany and other European nations as embarked on reconstruction of their economies. The issue here, which arises for consideration, is to what extent tax havens like Liechtenstein are right in this day and age is not disclosing information about a tax dodger."    

In other words, how right they are in taking shelter under their age-old laws to say that we do not consider tax evasion as a crime. Unless there is a proof of wrongdoing, proof of fraud there is no need for us to disclose this kind of information.

How will India be impacted? We will see the Indian governments resolve and stand further fortified in demanding information about it’s own citizens having wealth or income outside of India in tax haven jurisdictions be there in Europe, be there in jurisdictions like Mauritius etc I think mature jurisdictions Bermuda for instance in Mauritius as well are responding very well to this challenge by actually agreeing to share information even when there is no real allegation of criminal wrongdoing. 

Come 2011 and Indian companies will have to change how they account for M&A transactions. So what are those changes going to be?

PR Ramesh, Partner, Deloitte Haskins & Sells says, "IFRS requires one to identify which is the acquirer and which is the acquired entity. This could be different, based on form and on substance. For instance, if entity A which has an assets of Rs 10 crore and entity B which had assets Rs 100 crore merged and took form of a combined entity A - in form it may seem that entity A is acquired entity B, but in substance, it would be entity B which has acquired entity A. If we were to account on the basis of form - the Rs 10 crore of entity A would be added to the fair value of the of the assets of entity B which let us say is Rs 200 crore then you would get a combined total of Rs 210 crore. But if one were to account on the basis of substance, the Rs 100 crore of entity B would be added to the fair value of the assets of entity A, which lets say, is Rs 30 crore, you would get a fair value of Rs 130 crore which is significantly different from Rs 210 crore. So application of IFRS could change the way accounting is done as compared to Indian GAAP.