Hutchison Warns Off Possible Indian Tax Liability in Sale to Vodafone

Hutchison Telecom International has accepted that it might have to make some payments in regards to the ongoing tax dispute in India over the sale of its stake in Hutchison Essar to Vodafone in May 2007. Although the transaction technically occurred outside India, the government has been suing Vodafone for up to US$2 billion in sales tax that it claims is owed to it.

The sale of Hutchison's stake in the Indian mobile network operator was actually managed via a Mauritius registered company, CGP Investments Holdings - which held the 51.58% indirect shareholding in the Indian firm. As the transaction was entirely handled within  Mauritius, Vodafone has argued that no taxes are due in India. The Indian government disagrees, and legal action is ongoing in the Mumbai High Court. The Indian government's perspective is that the buyer (Vodafone) should pay any taxes due - and if Vodafone loses, it is expected to seek redress from Hutchison Telecom.

Hutchison Telecom stated in a recent SEC filing that "we may have financial exposure as a result of warranty, indemnity or other obligations assumed in connection with the sale of CGP Investments (Holdings) Limited, or CGP Investments Holdings, and may also be subject to Indian taxes payable in relation to this sale"

In the SEC filing, Hutchison said that it had received legal advice and believes that the sale is not taxable in India, and therefore, no Indian tax is payable by the firm. For that reason, the company has not set aside any liabilities in its accounts for a possible tax bill.

However, Hutchison also said that there can be no assurance what the final outcome will be, and if it eventually has to make any such payments or suffer any Indian tax on this sale, it may have a material adverse effect on the company's financial position and results of operations.

Hutchison Telecom International completed the sale in May 2007 to Vodafone for cash consideration of US$11.074 billion before costs, expenses and interest payable by Vodafone, plus the assumption of $2 billion of net debt. As part of the transaction, Vodafone was able to set aside US$352 million of the payment against any further liabilities, but that is dwarfed by the potential US$2 billion tax bill.

Vodafone currently owns an effective 52% stake in Vodafone Essar, but has revealed in a filing of its own that "put options" exist with fellow shareholders, Telecom Investments India and Omega Telecom Holdings where they can force Vodafone to buy their stakes, subject to Indian investment laws permitting. If the put options were exercised, then Vodafone could end up with 66.98% ownership of the company.

Posted to the site on 7th June 2009