Foreign tax haven base for infra SPVs
Govt is proposing to set up two SPVs. Netherlands, Cyprus, Singapore are the top choice destinations.
By Radhika Bhalla, TNN |
NEW DELHI: The proposed offshore special purpose vehicles (SPV) for funding infrastructure projects, that will utilise a part of the country’s $200-billion foreign exchange reserves, are likely to be set up in a tax haven.
The Netherlands, Cyprus and Singapore are among the locations that may be considered once a decision to set up the SPVs is taken. The government is proposing to set up two SPVs.
Since one of the proposed SPVs will lend to domestic infrastructure companies for financing their capital imports, the tax regime as well as lending norms of the country in which the SPV may be established will be factors that will determine its location, government sources said.
“If a decision to establish the SPVs is taken, it will be done in a tax haven,” a finance ministry official said. While an announcement to utilise a part of the country’s foreign exchange reserves for financing the country’s creaking infrastructure was made in Budget 2007, the proposal is yet to be reviewed formally by the central bank.
“The various applicable withholding taxes in a particular country, lending norms and exchange control restrictions will be the factors that will determine where such an SPV would be located. The Netherlands, for instance, has low withholding taxes and does not have stringent lending norms and exchange control restrictions,” KPMG India M&A tax head Girish Vanvari said.
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A company set up in a foreign country that lends to Indian companies is subject to taxes in both countries. For instance, a company based in Cyprus lending to an Indian company will receive interest income after deduction of a 10% tax by the Indian government. According to the India-Cyprus treaty, a 10% tax is levied.Also, the Cyprian government levies a 10% tax on interest income earned by local companies. However, under the double taxation avoidance treaty, such a company, while paying tax in the country of origin, would be remitted the tax paid in the country in which the money was lent.
Hence, the effective tax paid by a company located in Cyprus on interest income earned from lending in India would be only 10%. Effective tax rates in Singapore, the Netherlands and Mauritius are 18%, 15% and 21.12% respectively, experts pointed out.
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