India tackles Vodafone offshore abuse

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The FT has reported that:

The Indian government on Wednesday scored an early win in its efforts to force Vodafone to pay what lawyers estimate could be $2bn in capital gains tax on its acquisition of domestic mobile phone operator Hutchison Essar this year.

As the FT notes:

The case involves Vodafone's $11bn acquisition of a controlling stake in Hutchison Essar, one of India's biggest mobile phone operators, from the Hong Kong-based group Hutchison. Vodafone argues the transaction took place between offshore entities owned by itself and Hutchison and was outside India's jurisdiction. It also argues any tax liability lies with the Hong Kong group as the seller, and not with Vodafone as the buyer.

But the tax department seeks to show that since most of the assets were in India, the deal was liable to Indian capital gains tax. It also argues that under Indian law, the buyer in a deal is required to withhold any capital gains tax liability and to pay it to the treasury.

The significance of this case is hard to understate. India is arguing for a source and residence based capital gains tax system. Quite right too. This is the way to tackle vast quantities of offshore Capital Gains Tax abuse - including that by just about the whole private equity sector, worldwide.

After all, why should it be that because the ownership of shares is registered in a company wholly owned by the onshore participants to a deal no tax is due? This is a charade or sham at best. And Vodafone knows it. It would, of course, contravene the TJN Code of Conduct.

I wish India well. They're bringing a case of importance for the whole world.