In a welcome decision India’s courts have decided that the Indian tax authority does have the right to demand tax from Vodafone that it says that company should have withheld from Huthinson telecom when Vodafone bought Hutchinson’s Indian mobile phone network.
As the New York Times reports:
Indian tax authorities argued that Vodafone should have withheld capital gains taxes from the $11 billion it paid to Hutchison Whampoa for its 67 percent stake in Hutchison Essar, which is now known as Vodafone Essar, India’s third-biggest cellphone company by subscribers.
Indian officials contend tax is owed on the deal because the assets sold are based in India — a position that the court affirmed on Wednesday — and that Vodafone, as the buyer, was responsible for remitting the money to the government.
But Vodafone has maintained that no tax was owed on the transaction because it took place between offshore corporations — Vodafone and Hutchison — and the entity that was acquired was legally registered in the Cayman Islands.
The question was therefore one of substance over form.
The sale was of Indian assets. They were organised so that the entire transactions passed India by — which is obviously an abuse of the substance of the deal.
India has claimed the right to tax the deal — and I warmly welcome that. This is an act in pursuit of tax compliance — which is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes. The deal as legally constructed did not do that.
The case is not over yet — Vodafone can appeal — but with $2.6 billion at stake for India I sincerely hope they win out in the end. It will be an enormous step forward for developing countries.
And we should follow suit. Capital gains on UK based assets should be settled in the UK.
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Richard, perhaps you could clarify – not clear what you mean by “settled”. At present the law is quite clear that non-residents disposing of UK property are not subject to UK capital gains tax (unless they are acting through a UK branch). HMRC would have no grounds for challenging a similar sale of a UK company.
On the other hand there is an excellent case for a change of law, so that UK capital gains tax applies to non-residents disposing of UK situs property. The way the UK’s double tax treaties work means that the tax would in practice be limited to land and other immovable property. That caveat aside, it would be easy to enforce, cheap to collect and not distortive (in fact the opposite, as it would create a level playing field between UK and non-UK investors). Might even help dampen down the real estate market.
@Marc Daniels
You hit the nail bang on the head with your interpretation of my comment
Even more efficient would be to collect all land rent for public benefit. There wouldn’t be any capital gain to tax since bricks and mortar need constant inputs to maintain their value. A huge amount of valuable landed UK property is owned by foreign nationals and companies. If it is rented there isn’t even Council Tax (which is a joke anyway) or Business rates paid.
@Carol Wilcox
Oh dear. Hard to imagine a policy less fair and less workable than a 100% land value tax. Between this kind of thing and the Laffer curve-promoting Randites, it’s cranks to to the Left and cranks to the Right.
@Marc Daniels
You’ll really have to wake up to the importance of land in the economy at some time if you don’t want to get left behind.
Go study Harrisburg, PA – it’s perfectly workable and took the city from bottom of the league to near the top.
@Marc Daniels
What is unfair about those who benefit from holding state granted land titles paying the market value for the benefits they enjoy? It sounds perfectly fair to me. It works for mobile phone licences and oil drilling licences.
So if the Hutchison vendor company had been a UK company instead of a Cayman company, there would have been a UK gain on the disposal of the shares and an Indian gain because the Indian courts see fit.
That doesn’t seem right.
@Alex
Which is why we also have double tax agreements…..
@Paul Lockett (and Carol)
Spot on. Couldn’t agree more.
Except that current tax treaties would probaly not assist the tax payer in this case because the UK chargeable gain would probably be treated as a different taxable event from the deemed disposal of Indian assets, hence the gain on which the Indian tax arises is not the same gain as the one on which the UK tax arises, hence the double taxation provision may be ineffective.
@Alex
The the deal would have been structured differently….
@Alex
Wouldn’t the UK substantial shareholdings exemption have applied?
This comment has been deleted as it did not meet the moderation criteria for this blog specified here: http://www.taxresearch.org.uk/Blog/comments/. The editor’s decision is final.
You can try name calling at me, but not others
In this case, probably, but not all similar gains would qualify (less than 10% interests, non-trading groups) and who knows how long the SSE will last. Similar arguments would apply if the vendor was resident in many other OECD jurisdictions.
Are you suggesting tax avoidance? The obvious alternative would be a double Cayman structure. A bit ironic that you might be suggesting such structures to mitigate the uncertainty of tax treatment in third world jurisdictions, but there you go.