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Holcim + Lafarge = India Tax Bill?

Published on Mon, Apr 28,2014 | 16:18, Updated at Mon, Apr 28 at 16:52Source : CNBC-TV18 |   Watch Video :

This month two global cement giants decided to combine to create the world’s largest cement company with a total revenue of USD 44 billion and 470 million tonnes in capacity.

April 2014 Announcement
Swiss cement company Holcim & French cement company Lafarge to merge
Combined Revenue: $44bn
Combined Capacity: 470 mtpa

Holcim and Lafarge describe it as a merger of equals with each company having seven directors on the combined board. A transaction structured as a public exchange offer initiated by Holcim with an exchange ratio of one Holcim share for one Lafarge share - the offer would be subject to Holcim holding at least two third of the share capital and voting rights of Lafarge on a fully diluted basis.

April 2014 Announcement
'Merger of equals'
Each company to have 7 directors on combined board
Exchange Ratio: 1 Holcim share for 1 Lafarge share

LafargeHolcim would be listed in Zurich and Euronext Paris and would continue to be domiciled in Switzerland with central corporate functions in France and Switzerland.

April 2014 Announcement
LafargeHolcim to be listed in Zurich & Paris
Domiciled in Switzerland
Central corporate functions in France & Switzerland

How will the global mega-merger impact India? 

Well in India, Holcim is the controlling shareholder in Ambuja cements and ACC – both listed. That’s a combined annual capacity of over 58 million tonnes. Lafarge India is an unlisted subsidiary of Lafarge with a 10.5 million tonne capacity. The 3 together will have 69 million tonnes of capacity making it India’s largest cement group.

India Impact?
Holcim: 206 mtpa
Ambuja Cements: 28 mtpa
ACC: 30 mtpa        

India Impact?

Ambuja+ACC Contribution                         
- 15-16% of Holcim Revenue                                   
- 13-14% of Holcim Operating Profit
- Approx 30% of Holcim Net Profit                                                                       
India Impact?
Lafarge                221 mtpa
Lafarge India*     10.5 mtpa

*Unlisted so no disclosure of Revenue and Profits

That is likely to raise competition concerns and the global merger may result in some asset sales in India. That is one impact that’s already been much discussed. But today we are going to discuss the other – undiscussed impact – taxation! Could this global merger be facing an Indian tax bill? To answer that question CNBC-TV18’s Menaka Doshi spoke to ELP’s Rohan Shah & EY’s Amrish Shah.

India Impact?
Ambuja Cements             28 mtpa
ACC                                   30 mtpa
Lafarge India*                   10.5 mtpa

Doshi: Can a global merger at all attract tax in India by virtue of both companies who are merging having assets here in India?

Rohan: The factor of just having assets in India will not trigger a tax event but you ultimately have to see it in the context of the threshold of what is substantial. And at this point in time we have no definition of what is substantial and that is what is causing the worry. If you looked at it in the context of this transaction - assuming this was Lafarge merging into Holcim, given the nature of what Lafarge has in India as assets, it seems quite innocuous. It doesn’t seem to meet this threshold of being substantial. The worry that people have is that we just don't have a definition. And if we don't have a definition, their worries stems from the fact that you hear of anecdotes where in case of one business, because the headcount or the number of people employed is largest in India- even though the income attributable is low, even though the asset base is low- we will see it as substantial. So the worry right now is coming from some irrational interpretation of substantial.

Income Tax Act, 1961
Sec 9. Income deemed to accrue or arise in India
Explanation 5: …an asset or a capital asset being any share or interest in a company or entity registered or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India, if the share or interest derives, directly or indirectly, its value substantially from the assets located in India

Doshi: There could be two-three tax opportunities here. One is the global merger in itself. The second is if at all Lafarge in India is merged into Ambuja India in a sense to try and create a unified entity, then that merger might attract some tax scrutiny and that is a fairly standard process in India so there is not much to talk about on that count.

Third is if there are any asset sales in India on competition concerns those sales might have some capital gains involved in them. The last two instances that I have spoken off are well tested situations in India so we don't need to spend time talking about them.

This parent merger that we are talking about, Rohan says it is unlikely to attract any tax scrutiny in India, do you agree with that?

Potential Tax Events
Global merger of Holcim & Lafarge?
Subsequent combination of Indian assets?
Sale of Indian assets?

Amrish: The first thing that one needs to see is what is the subject matter of transfer as far as India is concerned. And if you look at this transaction, as I have understood it, Lafarge is going to merge into Holcim- so I don't think we need to look at the Holcim assets because neither they are not going to be subject matter of transfer nor the Holcim shares are getting transferred by the Holcim shareholders. So what is getting transferred is Lafarge shares which are held by the Lafarge shareholders at a global level. So that is the first thing that one needs to look at.

Then just stepping back before going to substantial, we need to look at whether there is a treaty protection available to those shareholders. Since Lafarge is in France, it is listed there and if the shareholders are from France then potentially there is a treaty benefit that is available on an indirect transfer and we have this case of Sanofi which as of now is in favor of the taxpayer and obviously pending before the Supreme Court. That is the second point that one needs to get into.

Let us look at one more thing- may be because it is listed, some shareholders are not in the treaty jurisdiction or protected jurisdiction, then we need to go to what is substantial. And there, we will have to look at what is the Lafarge’s value in India versus Lafarge value outside India. And substantial again, while it is not defined, there has been a pendulum swing as I see it. It started with 50 percent in the original DTC; when the law came, it was ambiguous and which is a case today also. It moved to 50 percent again in the Shome Committee recommendations but when the last DTC came it was 20 percent. So one doesn’t know where this will end and therefore since the law today is not talking of any of these percentages therefore again there is a lot of ambiguity. But I would think if it is less than 20 percent then by all counts it should not be substantial is how I look at it. If you look at different provisions in the Act, there are lot of provisions where 20 percent and substantial has been put together.

Doshi: Don’t foreign mergers get any protection under the Income Tax Act?

Amrish: If this merger is going to be the way we understand mergers in India whereby the merging entity needs to go out of existence, so that is the other element, which one will have to look in this transaction. Is it that the Lafarge entity is going to go out of existence and therefore the shares and if it is a direct holding by Lafarge into India and I don’t know their holding pattern but if it is a direct holding then there is a direct clear provision in the Act that the transfer of shares of an Indian company is not subject to tax provided two conditions are met. One is that 75 percent of the Lafarge shareholders become shareholders of Holcim, which will be the case as we know the deal and what has come in the public domain.Second is that it is not subject to taxation in the host country.

Rohan: You really have to see the home jurisdiction of the amalgamating company. So in which case you would have a sort of see what happens in France but the particular provision which is 47(vi)(a) says that the two conditions are cumulative and ultimately therefore the Indian tax position in a way is actually dependent upon the French taxation.

Income Tax Act, 1961
Sec 47. Transactions not regarded as transfer
(via) any transfer, in a scheme of amalgamation, of a capital asset being a share or shares held in an Indian company, by the amalgamating foreign company to the amalgamated foreign company, if-
(a) at least twenty-five per cent of the shareholders of the amalgamating foreign company continue to remain shareholders of the amalgamated foreign company, and
(b) such transfer does not attract tax on capital gains in the country, in which the amalgamating company is incorporated

Doshi: So you are the French expert because you did the Sanofi deal and won it at least at the High Court level. Would a merger of this nature be exempt from tax in France?

Rohan: I am not the jurisdictional experts but we have spoken to firms from France, they have been seeking opinions and the view there is that it will not attract capital gains in France in the context of how they are proposing this merger.

Doshi: So we are now only down to the substantial test?

Amrish: Yes, primarily.

Rohan: And if you do satisfy everything under section 47(vi)(a), then the substantiality test in that manner is less relevant because your first issue is would I come in the fold of Section 9. If I did, I still would have the 47(vi)(a) to fall back upon. So even if the substantiality parameter- for some reason, somebody interprets it to say it applies- then this is your fallback position.

Amrish: I think your indirect transfer will still exist. The reason is that the 47(vi)(a) exemption is to the merging company, it is not to the shareholders of the merging company.

Doshi: Let us examine what does substantial mean? You have put 50 percent, 20 percent, now Lafarge’s capacity in India is 10.5 million tonnes per annum- that is the only number we have because it is unlisted and we don’t have a revenue figure and that is a fraction of Lafarge’s global capacity which is 221 million tonnes per annum. So you have got 10 million tonnes and 221 million tonnes. Just by this figure, you know that Lafarge India does not contribute substantially to Lafarge’s global business in anyway; it cannot if the capacity is just a fraction. So would that mean that therefore Lafarge has no reason to worry?

Rohan: I started out by saying that I don’t think they will meet and come within the substantial parameter but the worry that everybody is carrying is that this is just so open-ended. Even if you see our definition what we are looking at in terms of the DTC, one threshold is 20 percent but we also have a right to prescribe a certain amount, which we can then say as Government of India we consider to be substantial. So even in that 20 percent is not the only parameter.

Doshi: This is 5 percent of their global capacity?

Rohan: And the question to ask is why are people still worried? One, because this is undefined. Second, in terms of the approach taken by the tax department in the past, they have brought up issues like headcount, turnover and different streams of income.

Doshi: There is 0.1 percent chance that in fact there is a tax claim that can be raised on this. Who would have to pay that tax?

Amrish: If you go back to what has happened in the famous indirect transfer case of Vodafone, they will want to go to Holcim because it is very difficult to catch a Lafarge shareholder.

Rohan: Incidentally they just have the larger footprint in India also.

Doshi: On on what would they end up paying the tax? How would the tax department figure out what portion of this deal must be attributed to India and therefore how it must be taxed? That is the other complex leg to this, isn’t it?

Rohan: And taken to its culmination where you cannot administer the mechanics of a demand or a tax, the tax should fail but I don’t think that is going to stop our guys if they think there is a tax.

Amrish: The issue is not going to be how you are going to administer. The issue for them is going to be how you are going to recover and that is how they will look at it.

Doshi: That is precisely the reason why I thought this might be a discussion worth doing on the show; not because the taxability of this transaction is a given but because it is not a given. There is 99.9 percent chance of there being no taxability and yet thanks to our track record we are unable to do away with the fear and doubt that there could be a tax claim.


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