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Vodafone Wins Indian Tax Dispute

by Mary Swire,, Hong Kong

25 January 2012

India’s Supreme Court has ruled that Vodafone Group Plc is not liable for a USD2.2bn bill in back taxes and penalties after the USD11.2bn acquisition of Indian mobile phone company Hutchinson Essar in 2007.

The ruling overturns a high court decision in favour of the Indian tax authorities. It had previously been decided that the takeover was taxable in India due to the indirect transfer of Indian assets. The Supreme Court decision however has absolved Vodafone of any liability, supporting the company’s initial belief that no tax was owed as the deal took place between two non-Indian companies.

Vodafone will also be refunded the USD496m deposit it had to make in November 2010, with 4% interest.

The case concerns the jurisdiction of the Indian tax authorities to demand capital gains tax on Vodafone's acquisition of Hutchinson Essar, with the main agreements having been signed in the Cayman Islands between non-Indian entities. The Indian Tax Office had said that Vodafone was liable to be taxed because the majority of assets were based in India, and that under Indian law buyers have to withhold capital gains tax. Vodafone, however, contended that as it was the purchaser, not the seller, it made no taxable gain from the transaction.

The ruling will reassure other international investors in relation to their own possible future tax liabilities in India.

Kevin Phillips, Corporate Tax partner and international tax specialist at Baker Tilly, explains: “The case effectively restores the previously widely understood order, and gives much needed confidence to existing and future foreign investors, and not just in India. There are a number of other important territories that also tax capital gains made by foreign investors on disposals of shares in companies in their territory (notably China). If the Indian Supreme Court had upheld India’s right to tax an indirect disposal of shares in an Indian company in this way, it could have cast doubt on the treatment of similar transactions in other territories. Foreign investors in such territories can breathe a little easier as a result.”

It is believed that the verdict will speed up deals between Indian businesses and other companies who had been waiting for clarity on tax law before proceeding.

This however, may not be the end of the matter, because of the implementation of India’s new Direct Tax Code in 2013. Some tax experts have suggested that the new law might create new tax liabilities for transactions similar to the Vodafone deal.

TAGS: court | capital gains tax (CGT) | tax | business | holding company | India | law | mergers and acquisitions (M&A) | offshore | corporate headquarters | multinationals | controlled foreign corporations (CFC) | penalties | telecoms | triangulation

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