Industry Cheers Vodafone Win against a $2.2 billion tax bill
The verdict gives much-needed clarity to foreign businesses that have been edgy about India’s tax regime, but the Indian government could speed up introduction of legislation to negate the impact of this decision on future deals.
The Supreme Court ruled that the Indian tax authorities have no jurisdiction to tax Vodafone’s $11.2 billion acquisition of the Indian cellphone company from Hong Kong's Hutchison Whampoa Ltd because it was structured as a transaction between two foreign entities. The Supreme Court further asked the Indian tax department to refund the 25 billion rupees ($500 million) that Vodafone had deposited, along with 4% interest.
The headline-grabbing verdict overturns a ruling by a lower court in Mumbai and ends a very expensive four-year legal battle for Vodafone in India.
“The case was being watched very closely by foreign companies as they saw it as an illustration of the uncertainties of doing business in the Asian powerhouse economy. This ruling sends a positive signal to foreign companies that India is open for business,” said Shan Nair, Co-Founder, Nair & Co.
* The deal, struck in 2007, was structured as a transaction between Vodafone’s Dutch subsidiary and a Cayman Islands-based company that held Hutchison Whampoa's India assets.
* India’s Supreme Court ruled that the deal is not subject to capital gains tax, which means that Vodafone had no reason to withhold tax. The court disregarded the fact that the main asset changing hands was a controlling interest in an Indian telecom company.
* The court said that the offshore transaction is a "bona fide" structure and the fact that the selling party’s Cayman Islands unit was in place for many years before the deal implied that the deal structure wasn't created just with the purpose of avoiding taxes.
* The verdict provides clarity for other foreign direct investors whose deals have similar structures to Vodafone and is a major boost for companies that are facing similar demands from India’s tax department.
* Some of the deals that are facing similar disputes include - Idea Cellular-AT&T, GE-Genpact, Mitsui-Vedanta, SABmiller-Fosters and Sanofi-aventis-Shantha Biotech. British firm Cairn Energy has already agreed to pay tax in India as well as the UK on selling its stake in Cairn India to Vedanta Resources. Depending upon the size of the stake sale, the tax liability could range between $850 million to over $1 billion.
“Many countries take an approach where tax authorities concern themselves only with the corporate structure of a merger deal, not the substance of what assets are changing hands. This ruling puts India in line with such global standards and it is reassuring for foreign businesses, but all eyes will now be on how the government responds to this $2.2 billion tax loss,” said Manoj George, CEO, Nair & Co.
Anti-Avoidance provisions in the proposed Direct Tax Code (DTC), a much anticipated overhaul of India’s archaic tax laws that is due to be implemented soon, make income from similar cross-border deals taxable in India.
The DTC provisions include that capital gains will be taxed in India on overseas acquisitions if the acquired company holds over 50 per cent assets in India.
Speculation is rife that the Indian finance ministry may include provisions in the Income-Tax Act in Budget 2012, which is due in February, to bring such income to taxation in all future transactions. The government could also seek a review of judgment.
Some experts also believe that a retrospective amendment to the law to tax past transactions cannot be ruled out.
About Nair & Co.
Nair & Co. provides you with your one touch outsourced finance, internal audit compliance, HR and legal department for your international operations. If you are expanding abroad for the first time, our turnkey solution will help you do so with minimal risk, stress and cost. We currently support more than 1000+ client operations in over 50 countries and have core offices in U.K., India, China, U.S., Japan and Singapore. Nair & Co. was named among the top 100 outsourcing services providers in the world by the International Association of Outsourcing Professionals (IAOP). Learn more at www.nair-co.com
Nair & Co.
1250 Oakmead Parkway, Suite 210
Sunnyvale, CA 94085, U.S.
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