Tag: Legitimate tax planning

India vs. M/s Redington (India) Limited, December 2020, High Court of Madras, Case No. T.C.A.Nos.590 & 591 of 2019

Redington India Limited (RIL) established a wholly-owned subsidiary Redington Gulf (RG) in the Jebel Ali Free Zone of the UAE in 2004. The subsidiary was responsible for the Redington group’s business in the Middle East and Africa. Four years later in July 2008, RIL set up a wholly-owned subsidiary company in Mauritius, RM. In turn, this company set up its wholly-owned subsidiary in the Cayman Islands (RC) – a step-down subsidiary of RIL. On 13 November 2008, RIL transferred its entire shareholding in RG to RC without consideration, and within a week after the transfer, a 27% shareholding in RC was sold by RG to a private equity fund Investcorp, headquartered in Cayman Islands for a price of Rs.325.78 Crores. RIL claimed that the transfer of its shares in RG to RC was a gift and therefore, exempt from capital gains taxation in India. It was also claimed that transfer pricing provisions were not applicable as income was exempt from tax. The Indian tax authorities disagreed and found that the transfer of shares was a taxable transaction, as the three defining requirements of a gift were not met – that the transfer should be (i) voluntary, (ii) without consideration and that (iii) the property so transferred should be accepted by the donee. The tax authorities also relied on the documents for the transfer of shares, the CFO statement, and the law dealing with the transfer of property. The arm’s length price was determined by the tax authorities using the comparable uncontrolled price method – referring to the pricing of the shares transferred to Investcorp. In the tax assessment, the authorities had also denied deductions for trademark fees paid by RIL to a Singapore subsidiary for the use of the “Redington” name. The tax authorities had also imputed a fee for RIL providing guarantees in favour of its subsidiaries. RIL disagreed with the assessment and brought the case before the Dispute Resolution Panel (DRP) who ruled in favour of the tax authorities. The case was then brought before the Income Tax Appellate Tribunal (ITAT) who ruled in favour of RIL. ITAT’s ruling was then brought before the High Court by the tax authorities. The decision of the High Court The High Court ruled that transfer of shares in RG by RIL to its step-down subsidiary (RC) as part of corporate restructuring could not be qualified as a gift. Extraneous considerations had compelled RIL to make the transfer of shares, thereby rendering the transfer involuntary. The entire transaction was structured to accommodate a third party-investor, who had put certain conditions even prior to effecting the transfer. According to the court, the transfer of shares was a circular transaction put in place to avoid payment of taxes. “Thus, if the chain of events is considered, it is evidently clear that the incorporation of the company in Mauritius and Cayman Islands just before the transfer of shares is undoubtedly a means to avoid taxation in India and the said two companies have been used as conduits to avoid income tax†observed the Court. The High Court also disallowed deductions for trademark fees paid by RIL to a Singapore subsidiary. The court stated it was illogical for a subsidiary company to claim Trademark fee from its parent company (RIL), especially when there was no documentation to show that the subsidiary was the owner of the trademark. It was also noted that RIL had been using the trademark in question since 1993 – long before the subsidiary in Singapore was established in 2005. Regarding the guarantees, the Court concluded these were financial services provided by RIL to it’s subsidiaries for which a remuneration (fee/commission) was required. India vs Ms Redington (India) Limited 10 Dec 2020 Madras High Court FY 09 10 ...

Brazil vs Marcopolo SA, June 2008, Administrative Court of Appeal (CARF), Case No. 11020.004103/2006-21, 105-17.083

The Brazilian group Marcopolo assembles bus bodies in Brazil for export. It used two related offshore companies, Marcopolo International Corporation, domiciled in the British Virgin Islands, and Ilmot International Corporation, domiciled in Uruguay, in a re-invoicing arrangement whereby the product was shipped from Marcopolo to the final customers but the final invoice to the customers was issued by the offshore companies. The tax authorities found that the arrangement lacked business purpose and economic substance and, on this basis, disregarded the transactions. Decision of the Administrative Court of Appeal The Court ruled in favour of Marcopolo. According to the Court, the transactions with the offshore companies had a business purpose and were therefore legitimate tax planning. Excerpts “6. The absence of an operational structure of the companies controlled by the Appellant, capable of supporting the transactions performed, even if, in isolation, it could be admitted within the scope of a “rational organization of the economic activity”, in the case at hand, gains greater significance because a) it constituted only one of the elements within a broad set of evidence presented by the tax authority; b) considering the size of the business undertaken (voluminous export), such absence cannot be such that one can even speculate on the very factual existence of such companies; and c) there is no effective evidence in the case records of the performance of the transactions of purchase and resale of products by such companies; 7. even if it can be admitted that the results earned abroad by the companies MIC and ILMOT were, by equity equivalence, reflected in its accounting, the Appellant does not prove having paid Income Tax and Social Contribution on Net Profits on those same results, thus not contradicting the arguments presented by the tax authority authorizing such conclusion; 8. There is no dispute in this case that a Brazilian transnational company cannot see, in addition to tax benefits, other reasons for conducting its operations through offshore financial centres. What is actually at issue is that, when asked to prove (with proper and suitable documentation) that its controlled companies effectively acquired and resold its products, the Appellant does not submit even a single document capable of effectively revealing a commercial relation between its controlled companies and the end recipients of said products; 9. it is also not disputed that the Brazilian economic environment, especially in the year submitted to the tax audit, is likely to lead to higher costs for national companies operating abroad, both in relation to competitors from developed countries, and in relation to competitors from other emerging countries. What is being questioned is that, specifically in the situation being examined herein, at no time did the Appellant at all materialize such costs, demonstrating on documents, by way of example, that in a given export transaction, if the transaction were effected directly, the cost would be X, the profit would be Y, and the tax paid would be Z, whereas, due to the form adopted, the cost would be X – n, the profit would be Y + m, and the tax paid represented Z + p. No, what the Appellant sought to demonstrate is that, considering a historical series of its exports, there was a significant increase in its revenues and, consequently, in the taxes paid. As already stated, if a significant capitalization of funds through evasive methods is admitted, no other result could be expected. (…) Thus, considering everything in the case records, I cast my vote in the sense of: a) dismissing the ex-officio appeal; b) partially granting the voluntary appeal in order to fully exempt the tax credit related to the withholding income tax, fully upholding the other assessments.” “I verify that, when doing business with companies or individuals located in Countries with Favorable Tax Treatment, the legislation adopted minimum parameters of values to be considered in exports; and maximum parameters in values to be considered in payments made abroad, under the same criteria adopted for transfer pricing. Here, it is important to highlight that the legislation did not equalize the concepts of business carried out with people located in Countries with Favorable Tax Regime and transfer pricing. What the law did was to equalize the criteria to control both, but for conceptually distinct operations. Thus, based on the assumption that Brazilian law specifically deals in its legislation, by means of a specific anti-avoidance rule, with transactions carried out with companies in countries with a favored tax regime, I cannot see how one can intend to disregard the transactions carried out by a Brazilian company with its foreign subsidiaries, since these are deemed to be offshore companies in the respective countries where they are incorporated. In fact, every country with a Favorable Tax Regime has, as a presupposition, the existence of offshore companies, in which the activities are limited to foreign business. In the case at hand, there are two wholly-owned subsidiaries of the Appellant, namely, MIC – Marcopolo International Corporation, located in the British Virgin Islands, and ILMOT International Corporation S.A., incorporated as an investment finance corporation – SAFI, in Uruguay. From what can be extracted from the case records, the deals carried out by the Appellant with the final purchasers of the products were intermediated by both companies, and the tax assessment charged, as income of the Appellant, the final values of the deals carried out by those intermediary companies with the purchasers abroad. However, this was not the legal treatment given by Brazilian law to business deals made with offshore companies established in Countries with a Favorable Tax Regime. Law 9430/96 is limited to checking whether the price charged is supported by the criteria set out in articles 18 to 22 thereof; once such minimum parameters are met, the business plan made by the taxpayer must be respected. Therefore, in this case, I believe that the Tax Authorities could not disregard the business carried out by the Appellant with its wholly-owned subsidiaries beyond what Law 9430/96 provides for the hypothesis of companies located in Countries ...