France india JV tax planning
Infosys & SNCF have decided to form a joint venture for providing specialized IT solutions in the Urban and Regional Transport space. SNCF has a deep understanding of the urban, regional and long distance transport business which it brings to the table. Infosys believes it can bring to the table the best in the industry practices from an IT & ITES perspective. It is with this background that the two companies have decided to form a JV.
Capital Structure of the JV In the proposed JV, Infosys will hold 65% and SNCF 35% in profits. The initial paid up capital will be €40M, with Infosys funding €26M and SNCF funding €14M. The JV will also need to raise €10M from debt as the total capital requirement stands at €50M. The capital requirement has been arrived based on the pipeline and order book (the JV is to start with). SNCF will transfer it's current IT assets amounting to €14M. Infosys will make investments of €14M which will be in the form of cash injection and transfer of assets. Infosys will set up a development center in India and in Rennes, France. The expected staff headcount is 150 in Rennes and 600 in India. Apart from these two countries the engineers will also be deployed (on secondment or otherwise) at customer site in various countries where the JV has its business.
Over a period of 5 years the two companies plan to increase the paid up capital of the JV to €230M and a debt of €70M on the books. Both SNCF & Infosys have explored possible business opportunities and have come with a list of high probability deals. For purpose of this case study assume that the JV has an order book as given in the following table.
Customer Country TCV (in €M) Tenure (in yrs)
Korail South Korea 80 6
SNTF Algeria 45 7
SŽDC Czech Republic 51 7
ATM Milan, Italy 75 7
CFL Luxembourg 43 5
Regio-Bahn Germany 65 7
DMRC Delhi, India 35 7
MÁV Hungary 15 5
SNCF France 75 7
* The revenue from all of the above contracts are recognized uniformly across the years of the contract From the above orders, the JV expects to make a PBT of 23%.
1. Propose a tax optimal entity structure for this JV considering the current order book as given in the previous table. Specifically compare and contrast the possible options as to where the JV should be head quartered and what should be the branch and subsidiary structure.
2. Considering an initial investment outlay of €50M across India and France (which also includes working capital), propose a ballpark investment outlay plan considering real estate (rental vs. owned), IT & Telecom infrastructure (including hardware and software), Furniture, fixtures, etc. Based on this, how do you propose to do your tax planning (at an overall and local entity level)?
3. Prepare a tax risk assessment for the structure you propose and arrive at optimal ETR for the deal
4. Analyze the impact of VAT on the JV structure assuming that some of the target customers may be state owned. Suggest any innovative structure to mitigate VAT inefficiencies if any.