Vodafone Serves Notice of Dispute against Indian Tax Law
Vodafone has served a Notice of Dispute against controversial proposals included in the Indian Finance Bill 2012 which allows the government to change tax laws retroactively as well as the power to reverse Supreme Court rulings and judgements.
In a landmark case in January 2012, 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.
In the Vodafone case, the deal, struck in 2007, was structured as a transaction between Vodafone’s Dutch subsidiary and a Cayman Islands-registered subsidiary of Hutchison Telecommunications International Ltd (HTIL) as the purchaser of the 67% stake in India based Hutchison Essar. 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.
Amendment to India Finance Bill
With an aim to prevent such foreign transactions which are commonly undertaken for foreign investment in India, the Finance Bill states that “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”.
Fearing that this provision in the Finance Bill will overturn the Supreme Court's verdict, the Dutch subsidiary has issued a Notice of Dispute which could involve international arbitration proceedings as per Netherlands' Bilateral Investment Treaty (BIT) with India.
Vodafone International Holdings BV being a Netherlands subsidiary qualifies as an investor according to the treaty principles. Vodafone is arguing that the Indian government is in breach of the treaty’s principles which includes fair and equitable treatment to investors. Therefore, it is urging the Indian government to abandon or suitably amend the retrospective aspects of the proposed legislation. However, if the government did not oblige, the company said it would initiate investment treaty arbitration proceedings under the BIT.
Proposed Amendments to Tax Evasion Laws
In light of this development, the Indian government recently announced amendments to the Finance Bill specifically to the retrospective measure of the tax evasion law. It clarifies that the retrospective amendments which are under consideration of the Parliament of India won’t be used to reopen cases where assessment orders have already been done. Also, the benefits will not be applicable to Vodafone like cases which involve low tax and non-DTAA destinations like Cayman Island. The amendment also clarifies that the tax evasion law will be applicable only to specific cases where a transfer is facilitated through a low tax or no tax jurisdiction which does not have a Double Taxation Avoidance Agreement (DTAA) with India.
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