Shishir Chaturvedi

CA Shishir ChaturvediIn this article, I endeavored to convey every aspect of an International/ cross boarder transaction and to explain them. It may be helpful to students of the subject and professionals & managers who are doing international transactions; to understand the whole plethora written across the world. The international trade and planning a cross boarder transaction, is very interesting thing and more an art than any specific ruling or science. Though most of the international transactions are being done with ones guts and instincts but the planning had also find its way in every transaction.

At the end I have also tried to bring specific characteristics of India, as the central point of attraction to bring interest of the Foreign Investors.

“International Transaction or Cross Border Transaction”

An International Transaction or Cross Border Transaction can be defined as a transaction in an international trade between two or more entities beyond the territorial limits of a country or a transaction in a domestic trade in which at least one of the party is located outside the country of the transaction.

a) Major types of Cross Border Transactions are:

Cross-Border Financing:

This term refers to any financing arrangement that crosses national boundaries. Cross border financing could include loans, letters of credit or bankers acceptances, Bank guarantees, depositary receipts etc.

Buying or Selling Products & Services:

This term refers to any buying or selling activities of products or services. Both may have different features with respect to infrastructure, permanent establishment, producing product or services outside the one’s jurisdictional area, trading across the borders, bridging between local resources and outside supply etc etc.

Combined research/ shared services:

In present business styles, entities are finding it fancier to have a shared service point. Entities are introducing joint research programs for entire industry as one cartel or chamber of commerce or group of commerce. This type of arrangements of shared service centers are also concern matter in international trade if those shared service centers providing services across the borders scattered in different locations. They are very useful to outsource the routine work in less expensive areas.

As a result of globalization, organizations today are required to make their non-core operations a strategic tool for enhancing their core capabilities, improve processes, lower costs, drive revenue, pledge quality and strengthen customer relationships with Business Outsourcing Solutions.

b) The following things may be consider before entering in to a cross border transactions:

  • Advance ruling.
  • Legal compliances.
  • Contract with States.
  • Change in Law (An exit route in case of change in ‘Laws of the Land’).
  • Choice between Liaison office set up or Branch office set up or subsidiary incorporation
  • Taxation Direct and Indirect.
  • Transfer pricing.
  • International taxation and applicable foreign laws.
  • Corporate tax planning.
  • Accounting and financial analysis.
  • Currency and Repatriation Issues.

c) Due Diligence Checklist for Cross Border M&As/ Buyouts:

Corporate Records:

  • Documents related to organization of the entity prior to incorporation and related to acquisitions, restructurings, reorganizations, bankruptcies, dispositions, repurchases, and changes of form.
  • Articles of incorporation & bylaws and all amendments thereto.
  • Minutes of the meetings, including shareholder/ members resolutions, written consents, and resolutions of executive committees.
  • All communications with shareholders including annual reports, letters, solicitations and proxy statements.
  • A list of all shares authorized, issued and outstanding along with their class and rights of voting, to dividend etc. Agreements relating to options, option plans agreements to issues securities, agreements to purchase securities and convertible securities.
  • All documents relating to anti-takeover measures or any agreement, plan or document that contains change of control provisions.
  • Organization charts showing ownership and operational structure, including information related to subsidiaries, divisions, joint ventures and affiliates.
  • Certificate of legal compliance from every concern departments of the state of incorporation, as far as possible.

Legal & Regulatory:

  • A detailed schedule of all ongoing, pending and threatened action, arbitration, audit, examination, investigation, hearing, litigation, claim, suit, administrative proceeding, governmental investigation, or governmental inquiry affecting the Entity, its assets or operations
  • Copies of all correspondence, reports to and filings with all regulators, including but not limited to the Securities & Exchange Commission, state securities authorities, foreign securities authorities, Environmental Protection and the ministry of Commerce.
  • Copies of all notices of legal or regulatory violations and infringements including correspondence, reports, notices, and filings related to any dispute, alleged violation or infringement by the Entity, its agents or employees of any local, state, federal or foreign laws, regulation, order or permit relating to employment violations, unfair labor practices, equal opportunity, bribery, corruption, occupational safety and health, antitrust matters, intellectual property and environmental matters.
  • All local, state, federal and foreign approvals, authorizations, certifications, clearances, licenses, permits, registrations and waivers related to the Entity, its operations or assets.
  • A detailed schedule of all breaches or defaults that have occurred under agreements to which the Entity is a party, including all agreements which would be affected by the contemplated transaction.
  • A list of expenses by the entity under the schemes of corporate social responsibilities during last 3 years along with description of ongoing social programs by the entity.

Securities & Investments:

  • A detailed schedule of companies in which the Entity holds an interest of 2% or more.
  • Copies of all offering circulars, private placement memoranda, syndication documents, or other securities placement documents, prepared or used by the Entity over the last 3 years.
  • Copies of contracts, agreements or engagement letters with investment bankers, finders, business brokers or other financial  advisers pursuant to any contemplated financial transaction over the last 3 years.

Intellectual Property:

  • A detailed schedule of all patents, trademarks, trade names, copyrights, service marks, symbols owned, held or used by the Entity, including ownership, adverse claims made, involvement in litigation.
  • A description of trade secrets and other unpatented proprietary information, description of significant technical know-how used by the Entity.
  • A detailed schedule of all license, royalty and technology sharing agreements to which the Entity is a party.
  • A detailed schedule of all agreements related to intellectual property, including use of technology or information, disclosure of information and confidentiality.
  • A schedule of all internet websites, domain names and software assets owned or licensed by the Entity.

Contracts:

  • A detailed schedule of all subsidiaries, partnerships, joint ventures and strategic alliances along with copies of all related agreements.
  • Copies of all contracts between the Entity and its officers, directors, shareholders and affiliates.
  • Copies of all loan agreements, bank financing agreements, lines of credit, promissory notes, guarantees, security agreements, mortgages, indentures, collateral pledges or other contracts with creditors.
  • Copies of all contracts related to sales, agency, franchise, dealer, marketing or distribution agreements or arrangements, supplier or vendor agreements.
  • Copies of all performance assurance agreements, non-compete agreements by/ for the entity.
  • Copies of all licensing agreements, franchise agreements and conditional sales agreements.
  • Copies of the Entity’s standard quote, purchase order and invoice forms, including standard terms and conditions.
  • Copies of any understanding, letters of intent, contracts, agreements, or closing documents related to any acquisition or disposition of corporate shares, companies, divisions, businesses, or other significant assets by the Entity.

Environmental:

  • A detailed schedule of all permits, licenses, registrations, notices, approvals, certifications, contingency plans and any other authorization related to environmental, health or safety matters.
  • Environmental audits for each property owned or leased by the Entity, if applicable. A detailed schedule of all hazardous substances (including dangerous, toxic, radioactive, or infectious substances, materials, pollutants, contaminants or waste) that the Entity has or may have used, stored, generated, treated, handled, released or disposed of.
  • A description of the Entity’s methods of handling, treating, storing, securing, transporting, recycling, reclaiming and disposing of hazardous materials.
  • Copies of all internal reports relating to environmental, health or safety matters, reports and correspondence involving the Environmental Protection Agency or any other environmental, health or safety regulatory group, agency or body.
  • A detailed schedule of all environmental, health or safety related litigation and investigations, whether settled, ongoing, or pending, over the last 3 years.

Financial:

  • All annual and quarterly financial statements for the last 3 years for the Entity and all its subsidiaries, if any, along with latest available interim financial information.
  • All communications with auditors, including auditor’s letters and replies and other correspondence for the last 3 years.
  • A detailed description of all accounting policies, including depreciation methods. A schedule of any changes in accounting policies, principles or procedures in the last 3 years, including justifications for such changes.
  • Details and descriptions of any extraordinary or non-recurring items appearing in the financial statements along with detailed schedule of all deferred income items during last 3 years.
  • A detailed schedule of all off-balance sheet transactions including lease liabilities and credit derivatives.
  • A detailed description of the Entity’s internal controls. All available entity-wide departmental budgets for the last 3 years.
  • Details of all transactions between the entity and its subsidiaries, parents, or other related parties.
  • A detailed schedule of long term investments, including shareholding, bonds and debt instruments along with statements of terms and condition related to Investments.
  • A detailed schedule of all property, plant and equipment, including acquisition cost, accumulated depreciation and depreciable life.
  • A detailed schedule of all contingent liabilities, litigations and suits.
  • The latest financial projections and estimates for the Entity and its subsidiaries, including a discussion of assumptions made.
  • The latest available capital budget, including a discussion of essential, non-essential and strategic investments.
  • A detailed schedule of all cash holdings and short-term investments.
  • A detailed schedule of inventory by product and geography.
  • A detailed aged schedule of accounts receivable by customer and geography along with confirmatory letters from debtors acknowledging their debts as far as possible.
  • An analysis of the entity’s monthly breakeven cash flow, broken down by fixed and variable cash inflows and outflows.
  • A detailed schedule of revenues and cost of sales broken down by customer, geography, and product for the last 3 years.
  • A detailed schedule of selling, general and administrative expenses by division, subsidiary and geography for the last 3 years.
  • A detailed schedule of all capital expenditures for the last 3 years, including a description of each major expenditure and abandoned projects, if any.
  • A detailed schedule of all accounts payable by vendor. A detailed schedule of all outstanding notes payable, bonds, mortgages and other long term debts along with terms and conditions thereof.
  • A detailed schedule by customer of orders booked for the last 3 years along with performance and collection statistics.
  • A detailed schedule of any restructurings, reorganizations or major operational changes undertaken in the last 3 years.
  • Description of services provided by accountants, auditors, financial advisors, actuaries, brokers and other financial professionals for the last 3 years.

Property:

  • A detailed schedule of all locations where Entity business is transacted, including offices, warehouses, stores and factories.
  • A copy of the deed or title to any real estate owned by the Entity as well as a description of all rights attached to the property along with list of mortgage (if the assets are under lien). A list of assets held by persons other than the entity for the trust of the entity.
  • A copy of all surveys, zoning approvals, variances, use permits or appraisals related to real estate owned by the Entity.
  • A detailed schedule of all real estate rented or leased by the Entity.
  • A detailed schedule of all capital equipment purchases and dispositions made during the last 3 years.

Credit Facilities:

  • A detailed schedule of all long-term debt facilities, including capitalized leases, guarantees and other contingent obligations, along with copies of all related documents.
  • A detailed schedule of all short-term debt facilities, including capitalized leases, guarantees and other contingent obligations, along with copies of all related documents.
  • Copies of all correspondence with lenders including consents, notices, waivers of default, and compliance certificates.

Related Parties:

  • Copies of any contracts or agreements between the Entity and any current or former director, officer, shareholder or affiliate of the Entity.
  • A detailed schedule of any amounts owed by the Entity to any current or former director, officer, shareholder or affiliate of the Entity and any amount owed by any current or former director, officer, shareholder or affiliate of the Entity to the Entity.
  • Copies of documents relating to any other transaction between the Entity and any current or former director, officer, shareholder or affiliate of the Entity.
  • Describe any interests of any current or former director, officer, shareholder or affiliate of the Entity in any business that competes with, conducts any business similar to, or has any arrangement or agreement with the Entity.
  • As far as possible; a statement from every related party in a transaction that the said transaction was transacted or is being transacted or will be transacted on an arms-length price.

Taxes:

  • All local, state, federal and foreign tax returns and filings along with all documents related to compliance with tax laws and regulations for the last 3 years.
  • All correspondence with local, state, federal and foreign tax authorities including audits, notices of proposed or final adjustments to the Entity’s tax liabilities for the last 3 years.
  • Assessment orders from the tax authority received in the past 3 years.
  • All agreements, consents, elections, requests, rulings, settlements and waivers made with any local, state, federal or foreign tax authority in the last 3 years.
  • All tax opinions received from attorneys, accountants or other specialists for the last 3 years.
  • A detailed schedule of all tax liabilities, tax basis of all assets, its accumulated depreciation and the depreciation method used.
  • A detailed schedule of all tax carry forwards and carrybacks, including their source, their expiration dates and any limitations on their use.
  • A detailed schedule of all tax free transactions not listed on the Entity’s tax returns.
  • A description of transfer pricing methodologies and description of advance ruling, if any.
  • A detailed schedule of all tax liens against the Entity’s assets.

Customer Information:

  • A detailed schedule of the Entity’s customers, along with annual sales to each customer over the last 3 years.
  • A description of the Entity’s standard sales terms and conditions.
  • Description of all marketing research, campaigns, plans, programs, budget and materials.
  • A list of the Entity’s 20 most significant competitors.

Products & Services:

  • A detailed schedule of all existing products and services offered by the Entity.
  • A detailed schedule of any complaints, warranty claims or litigation related to products or services offered by the Entity.
  • Copies of any tests, evaluations, studies, surveys and other internal reports related to existing or contemplates products and services.
  • A list of any ongoing research and development activities, R & Ds done and abandoned studies during last 3 years, if any.

Imports & Exports:

  • A description of the Entity’s major imports, the import process, and dealings with Customs Service. A list of applicable foreign laws and description of the Entity’s procedures and controls for complying with those laws.
  • A description of the Entity’s major exports and the export process. Include a detailed schedule of the Entity’s exports (both products and services), along with the annual amount of revenue derived from each export and the country to which the product or service was exported.
  • A statement of budgeted/ targeted exports and actual export by the entity for last 3 years.

Human Assets:

  • A list of all officers and directors of the Entity along with organizational charts describing management structure and lines of reporting and a list of all key employees, their function, their salary, their resume and their importance to the business.
  • All employment, consulting, change-of-control, non-disclosure, non-solicitation, or non-competition agreements between the Entity and any of its employees, contractors or consultants.
  • Documents describing any bonus, incentive or profit-sharing plans including funding requirements and schedules of amounts paid under the plan for the last 3 years.
  • Documents describing any group life insurance, death benefit, disability, accident, cafeteria, health, medical expense reimbursement, dependent care or sick leave policies or programs, holiday, vacation, leave-of-absence or sabbatical plans, savings, deferred compensation, supplemental unemployment benefit, welfare, salary continuation, severance pay, termination pay, change-in-control, worker’s compensation etc. including funding requirements; actuarial reports; financial reports or financial summaries.
  • Documents describing any stock option, stock purchase, stock appreciation right, stock bonus, employee stock option and employee stock ownership plans.
  • Copies of any collective bargaining agreements related to any labor unions or other employee groups. Details of any layoff by the Entity within the last 1 year.
  • A detailed schedule of any labor disputes, requests for arbitration, or grievances filed or pending within the last 3 years.

Other:

  • A detailed schedule of all law firms, accounting firms, consulting firms and other professionals engaged by the Entity over the last 3 years.
  • Copies of all licenses, permits or consents held by the Entity.
  • Copies of all press releases issued by the Entity over the last 3 years.
  • Copies of all insurance policies, whether by third parties or self-insured.
  • A detailed schedule of the Entity’s insurance claims history over the last 3 years.

d) Indian Viewpoint:

In India there are two Acts which primarily have concern when a person undertakes cross border transactions viz.

  • Foreign Exchange Management Act, 1999 & Reserve Bank of India (RBI) Guidelines; and
  • Income Tax Act, 1961

India is the largest democracy and largest economy in the world. With its consistent growth performance and abundant high skilled man power, India provides enormous opportunities for investment, both domestic and foreign. Reform initiative has been taken in the field of investment, trade, financial sector, exchange control simplification of procedure. India provides liberal, attractive and investor friendly environment to investors. The world is looking at India as an attractive destination with strategic incentives and lucrative commercial advantages. As compared to other developed markets, the India is largely under penetrated with a huge potential for growth.

As more and more investments are coming in India the clarity on regulatory and taxation front also strengthened. In India taxation system is under the Department of Revenue, Ministry of Finance. Taxability of income is determined by Indian Income Tax Act, 1961. With the countries with which Indian Government have signed Double taxation avoidance agreement in that cases the taxability shall be determined by Indian Income Tax Act, 1961 read with DTAA. As per section 90(2) of the Act an assesse has an option to choose from ACT or DTAA whichever is more beneficial to him.

Foreign companies engaged in business activities in India become liable to Indian Income Tax. According to Sect. 5 (2) Indian Income Tax Act, 1961 (“ITA”) nonresident companies are taxable in respect of the income received or deemed to be received, accrued or deemed to have been accrued or arisen in India. This definition covers income accruing or arising or and also deemed to have accrued or arisen to a non-resident whether directly or indirectly, through or from any business connection in India, Sect. 9 ITA.

The term “Business Connection” involves a relationship between the business of the assessee and some activity in India which contributes directly or indirectly to the earning of profits and gains by the assessee from his business. This is a very broad definition rendering almost any activity of a nonresident entity subject to tax in India. It is however required to be read with Double Taxation Avoidance Agreements (DTAAs) entered into by India with respective countries.

The DTAAs aim at restricting the right of a state to levy tax on income received by a nonresident entity from business activities pursued in that state. According to national Indian tax law, the provisions of a DTAA apply if they are beneficial for the foreign entity (“assessee”), Sect. 90 (2) ITA.

Any foreign entity may ask for an advance ruling with respect to any activity/ investment in India before starting such activity. Such advance rulings are precisely applicable to the parties of advance ruling and concerned tax authorities and it helps in limiting the dispute and tax liabilities.

This article is drafted for informational purposes only and should not be considered, or relied upon, as legal advice.

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