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SINGAPORE: Getting a more efficient tax structure is one of the key tasks of Singapore companies which are looking into mergers and acquisitions in India, despite a tax treaty between the two countries.
Experts said India adopts aggressive transfer pricing policies to ensure foreign companies do not shift their profits to other lower tax countries.
India also has a minimum alternative tax law that prevents companies from reducing their tax liabilities below a certain level. Companies have to pay a minimum alternative tax of 11.33 per cent if their income tax payable falls below 10 per cent of their pre-tax profit.
Kang Choon Pin, partner, International Corporate Tax Services, Ernst & Young, said: "The right way to go about transfer pricing is to look at the various functions that are performed in a typical transaction and try to think – are there any functions that I can perform outside India so that I can justify leaving more profits in the low tax country?
"With the alternative tax regime, what you have to do is to ensure that there is enough tax payable under the mainstream corporate tax regime, so that you don't get caught by the alternative tax regime."
Singapore signed a tax treaty with India in 2005, under which capital gains made by Singapore-listed companies are not subject to tax.
At the same time, non-listed firms do not pay a capital gains tax if they spend at least S$200,000 per year on operating expenditure in India. This must be made within the 24 months preceding the sale of shares in the Indian company.
On the other hand, Indian companies investing in Singapore are not taxed on capital gains.
Ernst & Young said firms can increase the value of their M&A deals with well-planned tax structures.
Mr Kang said: "Taking all your profits or the bulk of the profits by way of capital gains at the point of exit would be a very tax-efficient strategy, where you don't suffer dividends withholding tax, neither do you suffer interest withholding tax and capital gains... It is tax exempt in India and again not taxed in Singapore."
The current global financial crisis is likely to result in lower corporate profits, affecting the tax revenues of many countries. This may lead governments to explore other revenue streams.
"I envisage that there will be a greater focus on things like indirect tax, which is transaction-based such as GST or VAT. There will also be focus on transfer pricing to make sure that each country gets their fair share of revenue, as well as withholding tax," said Mr Kang.
Experts said a common mistake made by Singapore firms is to assume that tax rules in India are similar to those in Singapore. The way around this is to understand the tax requirements in detail, even if tax treaties exist.
- CNA/so
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