Why Cross Border Tax and Regulatory Planning is important for Entrepreneurs

In order to have global reach and attain widespread customer base, investments by Indians all over the world have gained momentum over the last decade. This is because investors are willing to explore new markets, have better technologies, scale their business, raise funds from VCs, procure various intellectual property rights etc. Thus we can say that the cross border transactions are becoming normal business practice in the Indian business ecosystem.

However, since policies brought in by the government see frequent changes, there exist various multi level regulatory and procedural stumbling blocks in the business ecosystem. Hence, taxation norms, regulatory aspects etc. plays a dominant role in the decision making process for cross border transactions as India has various taxation norms and regulatory authorities governing such transactions.

Why Cross Border Tax and Regulatory Planning is important for Entrepreneurs

Why should one have a proper tax and regulatory planning before scaling overseas?

-Helps to avoid long term taxation and compliance related hassles inflicted by various regulatories

-Helps in understanding sectoral caps and legalities on foreign investment (if any) in case such is practiced in the foreign country

-Repatriating of funds can be of hassles. Hence, one should know the most favourable way to repatriate before registration

-India has Double Taxation Avoidance Agreement (DTAA) with many countries. Through execution of plans, paying taxes in both the countries can be avoided helping entrepreneurs to keep more profit.

-When raising funds from Investors through an overseas holding company, it is generally advisable to have a proper road map.  This helps not only the company in long term planning but also the respective VCs

Many entrepreneurs only think of Incorporation when they scale globally. However, they should understand that when scaling globally, one needs to be very careful about various nitty-gritties. Some of the critical aspects to be pondered upon before making such transactions are:

A) Transfer Pricing:  It is one of the most important issues in International taxation. Any person who has undertaken an international transaction with an associated enterprise (entities participating in business transaction through intermediaries) is required to maintain information and documentation as per the rules. Various methods have also been prescribed to determine the pricing norms through which transactions can be done. In case of non compliance of the transfer pricing norms hefty penalties upto 200% of the tax payable on the under reported income has also been imposed.

B) Double Taxation: While considering critical aspects as to making cross border investments, double taxation shall have a predominant place. From company’s perspective, making investments outside India and repatriating the return can result into paying double taxation both in India and the investing country making a significant dent in the profit of the investor. In order to provide relaxation on such double taxation, India has signed DTAA with more than 80 countries. However, one should follow the right procedure to enjoy the benifits

C) RBI Compliance: FEMA and RBI compliances in India are incommodious in nature and cannot be ignored since very severe penalties and prosecution are imposed. Parties undergoing cross border transactions must follow the prescribed compliances or seek approval whenever and wherever needed. These compliances are time consuming procedures since various planning, implementations, time bound disclosures have to be done. There is also a dire need to adhere to various sectoral caps, investment caps etc. as brought in under the Act.

Say for example in India, upon contravention of these rules by any person, investigations may be carried out, summons may be given, and seizure of property, imprisonment or penalty may be imposed. Penalty as high as thrice the sum involved where it can be quantified or Rs. 2 Lakh where it cannot be quantified with additional penalties upto Rs. 5000 per day on furtherance of contravention can be levied.

D) Channelizing of funds: Channelizing funds to and fro from India to other countries is not as easy as it seems. So, take for instance as per the regulations in India, a shareholder cannot deposit his share subscription amount in a foreign country other than through bank and that too after complying with ODI Process regulated by Reserve Bank of India. In other words, if a promoter visit a foreign country and accordingly open a company and pay the subscription amount in cash; that becomes a no-compliance as per RBI.  

E) Round Tripping:  Round Tripping is a money laundering technique by which money that leaves a country through various channels comes back into the country’s business ecosystem as tax free foreign investments. One cannot ignore the presence of round tripping in the Indian business ecosystem whether deliberately or otherwise. Both RBI and Enforcement Directorate are coming down heavily with investigations on companies that have received investments from their foreign affiliates due to possibility of round tripping being involved in such transactions. A sound strategy in this regards will help to avoid careless mistake by the concerned company.

F) Contract:  A well drafted contract is a part of cross border transactions. In case it is not well drafted or properly reviewed, the contract to such transactions might have many loopholes resulting into disputes and disproportionate level of compensation for any breach committed by the either party.

With a well drafted contract, legal action can be imposed, giving a sense of security to the parties to the contract.

G) Selecting an Experienced and trusted advisor: Appointing an experienced and trusted advisor for helping in conducting cross border transactions in proper way is of great importance. Often, the entrepreneurs overlook this critical aspect of appointing an experienced consultant who have experienced in both home and overseas countries and invite long term hassles. A good connect between the advisor operating in both the countries would provide proper guidance to the entrepreneur for completing the compliance effectively.

Hence, it is very important to have a proper planning and structuring before one scale globally. This will maximize the return and mitigate the risk involved.

Taxmantra has assisted various companies in setting up and structuring their overseas entity so that they get the maximum tax benefit and also avoid regulatory hassles. In case you want our help feel free to reach out to us at [email protected]

Leave a Reply

Your email address will not be published. Required fields are marked *