Doing business in India
IFA – Technical Session – London - 19th April 2012
Massimo Ferrari, Des Webb - Vodafone
1
Vodafone India Tax Case
2
Vodafone – Hutchison structure of deal
British Virgin
Islands
HTI (BVI)
(Seller)
VIHBV buys
CGP Shares
VIHBV
(Acquirer)
Netherlands
Completed May 2007
Cayman
Islands
Mauritius
No transactions
below this line
CGP
14 Holding
Co’s
52%
India
3
Hutch Essar
Essar
33%
Others
15%
Background to structure
• Vendor, Purchaser and CGP were non-Indian resident companies, having no
presence in India.
• Purchaser inherited the existing structure of corporate entities, which all had
business, commercial and economic purposes.
– None of the companies created for the purpose of this transaction
– Number of the companies held a significant amount of debt and cash.
– Many of the non-Indian companies were acquired from third parties by the HTIL
group as early as 1992 - most recent one was incorporated in 1999.
– The legal structure of HTIL’s shareholding in Hutchison Essar had previously been
reviewed and approved by Indian regulatory authorities as being in compliance with
applicable laws in India.
• At the time of the transaction, Vodafone received extensive tax and legal
advice that transaction would be clearly outside jurisdiction of Indian tax law.
In nearly 50 years since the introduction of the Income Tax Act, these
types of transactions had never been subjected to tax
4
Timeline of events
Supreme Court decision: Tax
Office to determine whether
they have jurisdiction. VIHBV
has right to appeal directly to
High Court
01/09
Acquisition
Bombay High Court
decision: tax office has
right to investigate and
VIHBV files writ
can’t rule out
petition in Bombay
chargeability to tax
High Court
Announcement - Completion
02/07
05/07
10/07
Supreme Court
decision: transaction
is not taxable in India
and VIHBV does not
have a withholding
tax obligation
Bombay High Court 01/12
decision: some aspects
of transaction could be
Indian source and tax
office should be
allowed to proceed
12/08
09/10
02 - 05/07
Tax Office requests
information
5
09/07
Tax Office notice
to VIHBV
02/08
Retrospective law
change relevant to
withholding tax
obligation
05/10
Tax Office
concludes it has
jurisdiction
03/12
Finance Bill announced
proposing extensive
retrospective law
changes to 1962 and
overturning SC
judgment
Supreme Court decision – 20 January 2012
• Two separate judgments were handed down by the three judge bench and
both were unanimously in favour of VIHBV.
• The first Judgment, from two of the judges, found that the transaction was not
subject to tax in India at all and so VIHBV had no obligation to withhold tax.
Specifically it said;
– Legal form can only be disregarded in case of tax avoidance – not present here
– Holding companies have separate corporate existence to subsidiaries
– S9 is not a “look through” provision
– Legally what was transferred here was the share capital of CGP
– Need to “look at” the transaction itself
• The second also found that the transaction was not taxable but further found
that even if it had been taxable, that VIHBV would not have had any
withholding liability anyway as it was a non-resident company and as such
not subject to Indian withholding tax obligations.
6
Developments since 20 January 2012
• Review petition filed on 17 February 2012 –Now completely dismissed by the
Supreme Court
• Public Interest Litigation filed on 22 February 2012 alleging Judge conflicted
amongst other allegations – dismissed by SC on 2 March 2012
• Refund of deposit made by tax office on 20 March 2012 due to pledge made
to Supreme Court
7
India – 2012 Key Developments
8
Three major developments in 2012
• The SC tax ruling on Vodafone.
• The SC telecoms ruling.
• The Union Budget.
9
The SC telecoms ruling
• The SC ruled eight companies would lose some or all of their telecoms
permits (following the scandal-tinged 2008).
• Some operators have thrown in the towel…
• Some are willing to invoke the protection of Bilateral Investment Protection
Agreements…
10
The (retrospective) Indian 2012 Union Budget
• Retroactive taxation of indirect disposals of assets situated in India;
• Retroactive amendments of the definition of royalty;
• Retroactive amendments of the taxation income from satellite services;
• Retroactive imposition of withholding obligations on non residents.
• The CBDT empowered to retroactively define many terms used in tax
treaties.
• On top of:
– The “nuclear weapon” given to the Indian Tax Authorities in form of a GAAR;
– TP rules made applicable to domestic transactions.
11
The “Key Assumption”
• India’s capacity to attract FDI is not jeopardised by its taxation policies and
practices.
• But:
– FDI into India have fallen in 2011 vs. 2009 (-3%);
– While they have grown in all other BRIC countries: Brazil +150%, China + 31%,
Russia +31%.
– Of course tax cannot be the only reason, but…
12
The international reaction so far:
• Hot topic in the media in India and elsewhere.
• Seven business association from UK/US/Canada/Japan/Hong Kong sent
their complaints to the Indian Government, on top of TEI and BIAC.
• The UK Government clearly made the point during the recent visit to India.
13
Current discussion topics in India
• Proposed amendments are not in line with international tax law and practice
and trigger unrelieved double taxation.
• They are not consistent with the international approach to retroactive tax
legislation which is either not permitted or strictly restricted/controlled. E.g. the
recent case in UK (which has become extremely popular in India…).
• Nowhere else retroactive changes affect final and definitive court decision
(and in most countries not even ongoing litigations). This would contravenes
fundamental principles:
– Respect of the rule of law;
– The independence of the judiciary;
– The separation of powers between the judiciary, the legislature and the
administration;
– Etc.
14
Possible developments
• The Finance Bill 2012 is not approved in its current form (but the Government
is currently taking a defensive stance…).
• The proposed amendments are ruled unlawful as a matter of the Indian
Constitutional Law.
• BIPA protection?
15