Vodafone Dismisses Indian Tax Compromise

by Mary Swire, Tax-News.com, Hong Kong

23 March 2011

Vodafone has said that it continues to believe the company had no tax liability over the purchase of an Indian mobile phone company in 2007. This is despite comments from Marten Pieters, chief executive officer, who said in a recent TV interview that Vodafone may accept a “good compromise” over the huge tax demand from the Indian tax authorities.

Vodafone’s appeal is against an order which upheld an INR110bn (USD2.4bn) capital gains tax bill in respect of the USD11.2bn acquisition of Hutchison Telecom International Ltd’s (HTIL) stake in a Cayman Islands company, by virtue of which Vodafone acquired the Indian Hutchison Essar mobile phone network.

The matter has arisen over the jurisdiction of the Indian tax authorities to demand capital gains tax. Vodafone has maintained that there is no jurisdiction, the main agreements having been signed abroad between non-Indian entities. It has, however, come to light that a small part of the total acquisition documents involved Indian interests and were signed in India.

It was acknowledged by the Indian Supreme Court that an apportionment of liability concerning the Indian content of the contract could be a possibility. Vodafone's appeal with the supreme court is scheduled to come up for hearing in July.

The attorney general on behalf of the Indian government has previously told the court that although HTIL was primarily liable, the government was unable to recover the dues from it since the Hong Kong-based group had withdrawn entirely from India.

There have been moves for resolving the dispute through different avenues. The Netherlands government was reported to have written to the Indian government on behalf of the Vodafone Dutch holding company with a view to arranging an out of court settlement, using mutual agreement procedures provided in the double taxation agreement between the two countries. While this has been going on Vodafone has been asked to pay the court a deposit of INR25bn (USD552m), and provide a bank guarantee worth INR85bn with a state bank.

A statement issued from the Vodafone Group said that every adviser it had consulted, both during the transaction and since, were in unanimous agreement that no tax liability should arise. "The law is clear and India has not sought to tax such transactions before. To do so, would be contrary to international taxation principles, which are specifically designed to encourage foreign investment and eliminate barriers to trade."

“Vodafone will continue to defend its position vigorously and will look forward to the matter being reviewed in full by the Supreme Court on July 19," the company stated.

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