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Vodafone Challenges Indian Tax Law

by Mary Swire,, Hong Kong

23 April 2012

The ongoing tax dispute between India and Vodafone has erupted again, with the telecoms company now serving a Notice of Dispute against the government's controversial new retrospective tax legislation.

Proposals included in the Indian Finance Bill 2012 provide the government with the power to retroactively change tax laws and overturn a series of recent rulings and judgments by the courts, including the Supreme Court.

In January, the government lost its five year battle with Vodafone in the Supreme Court, when it was ruled that the company was not liable for a USD2.2bn bill in back taxes and penalties in connection with its acquisition of a majority stake in mobile phone company Hutchinson Essar in 2007. The government was also ordered to repay the USD496m deposit paid by Vodafone in late 2010, plus 4% interest.

In the Vodafone case, the tax authorties took issue with the way that this transaction was structured, which involved Vodafone International Holdings, a Dutch-registered subsidiary of Vodafone Group, making the USD11bn payment to a Cayman Islands-registered subsidiary of HTIL, in order to acquire a 67% stake in Hutchinson Essar.

In a bid to catch such transactions - a major route for foreign investment into India - in the Indian tax net, Finance Bill 2012 clarifies 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”.

Vodafone believes that the Finance Bill measure will overturn the Supreme Court's verdict. Its Dutch subsidiary has therefore issued a Notice of Dispute, taking the first step towards international arbitration proceedings under the terms of the Netherlands' Bilateral Investment Treaty (BIT) with India. As the subsidiary, Vodafone International Holdings BV, is a company constituted under the laws of the Netherlands, it qualifies as an investor as defined in the treaty.

The treaty commits the Indian government to accord fair and equitable treatment to investors, an obligation Vodafone argues the government is in breach of. Consequently, it has requested that the government abandon or suitably amend the retrospective aspects of the proposed legislation, stressing that it would prefer to reach an amicable solution to this matter. It has nonetheless warned that if the government is not willing to do so, the company will take whatever steps are necessary to protect its shareholders’ interests. This includes commencing investment treaty arbitration proceedings under the BIT.

TAGS: court | capital gains tax (CGT) | compliance | tax | investment | business | holding company | tax compliance | India | Netherlands | law | investment treaty | corporation tax | group taxation | controlled foreign corporations (CFC) | legislation | tax reform | penalties | telecoms | triangulation

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