India and Vodafone: a welcome case of substance over form

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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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