The BSEPS, the Double Decker and the Foreign Funding - 3 Words Startup Need to Worry About
In July one of the famous business news daily has reported that Seoul may soon emerge a top way station for foreign investors routing to India. The news reporter was candid in claiming that Months after India amended its tax treaty with South Korea, foreign investors (FIs), especially some Asian ones, has already started investing through that country. Irony of the Government of India is that whenever they enter into a Tax Treaty, it facilitates a route to escape the tax Liabilities in India and creating all trouble for taxmen.
However the success of India and most importantly for startups, it is impossible to imagine without the Foreign PE Funding. Unfortunately this investment, if not carefully examine, at the time of acceptance, may put recipient venture into a real trouble. Many PE firms, who in recent years have invested heavily in India’s Tech and Non tech emerging companies, before entering into India, have created structures, by creating a buffer company from where investments in India is being made, known as double-decker.
The process is simple: Set up a firm or pooling vehicle in a Country, then set up another step-down subsidiary in the same country. And make investment from that company so that at the time of sale, the shares in the subsidiary can be sold to a new buyer. By this way PE Firms make profits in one jurisdiction, and shift them across by exploiting gaps and mismatches in tax rules, to take advantage of lower tax rates and, thus, not paying taxes in India, where the profit is made
The European countries such as Germany, France, Ireland, Korea, Netherlands and Luxembourg, with whom the Indian Government has entered the tax treaties, allow International PE firm to use similar structure and escape the Taxation in India by providing safeguard if a pooling vehicle invests in India through another company registered in these destinations. Needless to tell the Work for Authorities becomes more difficult when these entities are made only in those countries which prevent Indian authorities from probing such transactions.
However the well discussed but yet to be implemented GAAR and Base Erosion and Profit Shifting (BEPS) formula are going to change the scenario by allowing the tax department , who post implementation, may question the intent of creating such structures. Base erosion and profit shifting (BEPS) refers to tax avoidance strategies that exploit gaps and mismatches in tax rules to artificially shift profits to low or no-tax locations.
India is the first country to impose such a levy, post the OECD action plan after the tax panel has recommended expanding the ambit of this levy to cover a wide gamut of transactions including online marketing, cloud computing, website designing, hosting and maintenance, platforms for sale of goods and services, and online use of or download of software and applications. But it is not alone in implementing this structure.
Iin fact The Organization for Economic Cooperation and Development (OECD) and G20 countries have developed an Inclusive Framework on BEPS which allows interested countries and jurisdictions to work with OECD and G20 members on developing standards on BEPS related issues and reviewing and monitoring the implementation of the whole BEPS Package.
Monitoring implementation and the impact of the different BEPS measures is a key element of the work ahead. Members of the Inclusive Framework will develop a monitoring process for the four minimum standards as well as put in place the review mechanisms for other elements of the BEPS Package. The monitoring of the four minimum standards will ensure that all members, as well as jurisdictions of relevance, will comply with the standards in order to ensure a level playing field.
Quite evident the smooth route is not going to remain as smooth as it seems now and the investors including the companies, on pursuit of money have accepted the same without assessing the pros and cons may get into trouble.
“If you think compliance is expensive, try non-compliance." This statement was made by Former U.S. Deputy Attorney General Paul McNulty, years back, still relevant for all sitting on the verge of foreign funding.
