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Vodafone Gets Reminder of $2 Billion Indian Tax Demand
Published on:
Vodafone has been sent another demand for over US$2 billion in outstanding tax following its 2007 purchase of a controlling stake in its Indian mobile network subsidiary.
The company has been fighting the tax demand ever since the government sued for the payment. When the Supreme Court ruled in Vodafone's favour, the government simply changed the law, and made it retrospective so that Vodafone's previous transaction was now taxable in a way it wasn't back in 2007.
Vodafone said it told the government in a reply that "it continues to believe that no tax is payable on this transaction." The company also confirmed that the demand did not contain a payment due date.
The company has already said that it might seek international arbitration under a treaty between India and The Netherlands, where Vodafone's holding company is based.
Although Vodafone took control of the then Hutchison Essar back in 2007, the transaction was routed via offshore subsidiaries. As this is a common practice for many companies, Vodafone felt that no taxes were due in India. The government's counter-argument is that the location of the assets, not the jurisdiction of the transaction is the primary issue.
Vodafone International Holdings BV, a company registered in the Netherlands, acquired the entire share capital of CGP Investments (Holdings) Ltd, a Cayman Islands based company from Hutchison International (HTIL). CGP, itself, owns 52 per cent stakes in Hutchison India.
Vodafone Essar had argued that Vodafone Holdings , CGP Investments as well as HTIL are foreign companies and as the transaction was structured through Mauritius, capital gains cannot have been accumulated within India. Also India and Mauritius have a double taxation avoidance treaty, so it would not be possible for India to apply capital gains tax on transactions that are already taxed within Mauritius.
Following the loss of the court case, the government's subsequent decision to retrospectively change the tax-laws caused alarm amongst investors, as a stable legal/tax system is considered essential for long term plans.
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