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Vodafone vs India: Episode II, by Sagar Wagh

September 28, 2013

In this excellent article, Sagar Wagh summarizes “one of the world’s ‘hottest’ tax dramas of our times,” i.e. the legal battle between Vodafone and Indian authorities. In 2007, the mobile telecommunications giant acquired a mobile operator in India, called “Hutchinson Essar”  from international group Hutchinson. The transaction was structured (as usual) among offshore entities, for operational convenience and tax optimization:  Vodafone International Holdings BV, registered in Netherlands, bought a Cayman Islands’ entity from ‘Hutchison Telecommunications International, also registered in Cayman Islands.

India’ s tax authorities challenged the acquisition, claiming that the offshore structure was a pure tax avoidance scheme, and that the underlying asset was an entity operating in and deriving its value from India. Thus, Vodafone was asked to pay in India a $2.5 billion capital gains tax… Of course, the matter was brought before the Indian courts, where last year, after a long legal battle, the honorable Supreme Court of India ruled in favor of Vodafone, stating that “exiting a business is an important right of any strategic investor, and Vodafones’ sale was a genuine business transaction and not just a tax avoidance scheme.”

One can easily understand the frustration of Indian authorities, as well as the importance of the Court’s decision for case law purposes, not only in India but worldwide. It supported the claim of most international investors that dealing between two non-resident entities is out of the scope of local tax authorities. And here is where the Indian Administration jumps into the game, and passes a law which retroactively stipulates that “a capital asset, being share or interest, in any foreign entity shall be deemed to be capital asset situated in India, if such share or interest derives directly or indirectly its value substantially from the assets located in India.”

This is a typical tax people’s reaction who can unilaterally modify the rules of the game, claiming “national interest” reasons. Although Vodafone had further legal means to use, it seems that it preferred a conciliation approach, whereby it would accept to pay the tax provided Indian authorities wave off interest and penalty.

Bottom line: there is a fierce worldwide battle under way, in the tax arena, between multinational companies and national authorities. All the ways are good in this battle, including laws or amendments crafted for one company. One could also conclude that countries are trying hard to deter through taxation foreign investors, adding to their current recession.

For the full text of Sagar’ s article look here:


From → Views & Opinions

One Comment
  1. Reblogged this on sagarwagh.

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