Vodafone Pushes for Arbitration over Indian Tax Demands
Published on: 7th May 2014
By: Ian Mansfield
Vodafone has escalated its long running Indian tax dispute by filing for formal arbitration and killing off the government's conciliation talks.
At the heart of the dispute is an Indian government demand for USD2 billion in taxes on Vodafone's original investment in the country back in 2007. When the government lost a string of lawsuits, it changed the law to make Vodafone liable. That move spooked investors worldwide and increased pressure on the government to seek a settlement.
Vodafone had been said to be keen on a settlement, if only to avoid the risk of the dispute overshadowing any attempts to acquire smaller networks in the country in the expected consolidation wave.
The unexpected move by the company suggests that the negotiations were not progressing in a favourable manner for Vodafone.
India's Finance Ministry has moved a Cabinet note for withdrawal of the non-binding conciliation offer it had made to Vodafone in June last year.
That conciliation offer was however seen as an attempt to encourage Vodafone not to seek the highest sanction, which is International Arbitration. The move takes the dispute out of the country, and it could now drag on for several more years.
Vodafone is now seeking to have the arbitration held in London, which while a respected centre for such disputes might be problematic in that Vodafone is also a UK headquartered company, which will always lead to allegations of bias, regardless of the outcome.
Vodafone can call upon International Arbitration as the transaction was technically routed through its Dutch subsidiary, and there is a supporting legal framework between India and the Netherlands for such situations.
Vodafone had paid USD11.2 billion for a 67 percent stake held by Hutch Telecommunications International in Indian GSM operator Hutchisson-Essar (now Vodafone Essar).
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 has 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.
Although Vodafone had argued that the transaction occurred overseas - the court decided that as the assets were largely based in India, therefore taxes should be paid in accordance with Indian laws. The Income Tax department had argued that Vodafone should have withheld the tax payable from the sum paid to Hutchison Telecom, while Vodafone was of the opinion that any tax liability should be paid by the beneficiary - namely Hutchison.
Vodafone could however, face a potential USD4 billion penalty if the company loses the appeal - as the government is entitled to demand to levy a penalty which can result in a doubling of the outstanding tax demand.