Eyeing lower taxes, Accenture seeks reduction of capital

Consultancy multinational Accenture Solutions expects to avoid a substantial amount of tax for its Indian operations as it seeks nod from its creditors on Thursday for reduction of its capital from ₹5,361 crore to ₹2,263 crore.

It has now applied to the National Company Law Tribunal for reduction of its share capital, which will allow it to pay over ₹6,000 crore to its overseas shareholders.

This step is being undertaken in spite of the fact that the overseas parent has made no foreign direct investment to that extent in the Indian subsidiary. The reduction in capital will be carried out by the payment of ₹19.68 per share. This is being done to ensure that Accenture will have to pay far less tax than the mandatory dividend distribution tax at the rate of 20 per cent. The company had in September 2017 sent a notice to the creditors seeking permission for the capital reduction.

As mentioned in the company financials filed with the Registrar of Companies, there was an increase in the firm’s share capital after 2016, from ₹47 crore to ₹5,361 crore, following the merger of Accenture Services, the flagship company of Accenture in India, into the much smaller Accenture Solutions.

The filings say Accenture Solutions issued shares for the acquisition of Accenture Services, in effect converting the reserves of the latter into the share capital of the former. This resulted in the share capital going up.

An Accenture spokesperson told BusinessLine that the proposed capital reduction is a standard business practice and will not affect the firm’s India operations, clients or employees.

With the move to convert pre-merger reserves to share capital post-merger, the company expects to avoid dividend distribution or buyback tax, as when it gets distributed, it would pay less tax on the capital reduced and thereby avoid substantial amount in taxes.

The company spokesperson said Accenture pays tax in accordance with the tax legislation in each country in which it operates.

An independent analyst said the merger by a company with a reserve of over ₹5,200 crore into a smaller company with reserves of about ₹206 crore seems unprecedented. The Accenture spokesperson, however, said the merger of two Accenture entities simplifies and consolidates their corporate structure in India, and was approved by the relevant authorities.

It may be recalled that after the dividend distribution tax was introduced in 1997, several multinational companies started share buyback to avoid the tax and further avoid capital gains tax due to their parent being registered in one of the double tax treaty havens such as Mauritius.

Capital reduction was seen as a new means to avoid the buyback tax introduced in 2013, and amended in 2016, as it is not considered dividend distribution or buyback of shares. “But what the Income Tax Act would have considered is a genuine capital reduction of capital brought in as investment and not capitalisation of profits in whether by bonus shares or merger,” the analyst told BusinessLine .

However, Indian corporates cannot avail themselves of these benefits as their parents are not registered in tax havens.

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