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Vodafone's Indian Tax Bill May Double

by Mary Swire,, Hong Kong

06 July 2011

Leading telecoms company Vodafone has warned that the firm's back tax liability in India could double if the Indian Supreme Court rules in favour of the country's tax authorities with regard to a long-standing tax dispute.

Andy Halford, Vodafone's Chief Financial Officer, has revealed that the tax case could cost the company more than the USD2.5bn it previously envisioned. Taking the worst-case scenario, Halford said taxes and penalties could amount to USD5bn, although the High Court in April did request that authorities defer applying penalties until the dispute had been resolved.

The case relates to Vodafone's acquisition in 2007 of two-thirds of Indian mobile operator Hutchison Essar for USD10.9bn. Authorities reportedly argue that the deal was structured with the specific aim of avoiding paying tax in India on the transaction. According to previous statements from the company, Vodafone has maintained that Indian tax authorities have no jurisdiction to claim the payment of capital gains tax as the transaction occurred abroad, between non-Indian entities.

The purchase took place between Vodafone's subsidiary company, Vodafone International Holdings, based in the Netherlands, with payment being made to a subsidiary of Hutchison's in the Cayman Islands. While the main agreements were signed outside India, the authorities' claim may relate to the fact that some minor acquisition documents involving Indian entities were concluded in India. Vodafone has further argued that if the Court rules the transaction should be subject to capital gains tax, it should instead be levied on the seller, not on the acquirer.

Vodafone has previously stated that it is to continue to 'vigorously' defend its position in the Supreme Court's hearing, to commence on July 19. The long-running case is expected to be reviewed by the Court over a twelve-week period, with a ruling expected to follow months later.

Vodafone Group has said in the past that it is confident that the tax authorities' claim will be overturned, noting that every adviser it had consulted, both during the transaction and since, were in unanimous agreement that no tax liability should arise (in India). "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," the company has said.

TAGS: court | capital gains tax (CGT) | tax | business | holding company | India | Netherlands | law | mergers and acquisitions (M&A) | Cayman Islands | offshore | multinationals | penalties | telecoms | triangulation

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