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Tax Case Prompts Review Of India's Investment Agreements

by Lorys Charalambous,, Cyprus

07 November 2012

The government of India is delaying entering into talks on foreign investment protection with other countries, due to Vodafone’s plans to launch international arbitration proceedings over the country’s intention to tax the company retrospectively.

India’s decision came to light ahead of a visit to India by Canada’s Prime Minister, Stephen Harper, and Canadian High Commissioner Stewart Beck has now confirmed that the Indian government intends to examine all its investment agreements before finalizing any new ones.

The dispute with Vodafone dates back to 2007, when tax authorities decided that Vodafone owed USD2.2bn in back taxes and penalties associated with the company’s acquisition of mobile phone company Hutchison Essar. In January 2012, the Supreme Court ruled in Vodafone’s favour and awarded costs plus interest; however, a new Finance Bill introduced in March threatened to overturn the decision by bringing a payment made to a Hutchison subsidiary in the Cayman Islands into the Indian tax net.

The payment was made by Vodafone International Holdings BV, which is a Dutch Vodafone subsidiary, and Vodafone responded to the Bill by moving towards international arbitration proceedings under the terms of the Bilateral Investment Treaty between the Netherlands and India, which commits the Indian government to accord fair and equitable treatment to investors. However, Vodafone expressed willingness to enter into talks in September.

In August, new Finance Minister P. Chidambaram announced a review of retrospective tax provisions in the hope of finding "fair and reasonable solutions". In October, a government panel issued a draft report advising that taxes should apply only to new mergers.

TAGS: capital gains tax (CGT) | tax | business | India | Netherlands | law | group taxation | agreements | multinationals | controlled foreign corporations (CFC) | Canada

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