Vodafone won its tax appeal in India yesterday, saving it a substantial tax bill that India had been claiming was due on its takeover of the Hutchinson mobile phone network in that country. The Economic Times of India has as good a comment on the implications of the case as could be made:
The Supreme Court has ruled that Indian tax authorities have no jurisdiction over Vodafone's purchase of Hutchison's interest in its mobile telephony joint venture in India with Essar, as the deal was executed through sale of a holding company registered in the Cayman Islands.
The ruling is a setback not only for India's fight against tax havens but also for taxation in general. For, the court's privileging of form over substance, maintaining the corporate veil, could lead to elaborate and extensive tax planning that results in enormous leakage of revenue.
The implication is clear. The judges are interpreting the law as it stands. India needs to rewrite its tax laws, to enable it to deal with commercial practice in a globalising world.
If every ABC Ltd operating in India is henceforth not to be owned through a holding company registered in some tax haven or the other, so as to permit acquisition by XYZ Ltd through its holding company registered in another tax haven without paying any capital gains tax, the language of tax law will have to make it clear that what counts is whether value accrues to the company changing ownership because of its economic activity in India.
Precisely so.
This was a transaction relating to Indian assets that India wanted to tax, and thought it could tax. But it was recorded 'elsewhere' in a tax haven structure. And the result is that the legal form of recording it 'elsewhere' has meant that Inida's laws have been subverted and tax is not due. That's the tax haven issue in a nutshell.
Now it is time for the OECD, UN and others to agree how such abuse can be tackled so that transactions are not taxed where there form is but where their substance is. Because the cost to society otherwise will be enormous, as it is in this case where a developing country has lost out on resources it badly needs.
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I venture to suggest that the greatest contribution we can make in terms of overseas aid, is to put an end to tax havens !!! . Vodafone’s behaviour in this case is deplorable.
Hear, hear!
Vodafone is the buyer – so you want the buyer to be liable for CGT (as opposed to being the collection agent).
Anyway, if the Indian government want to tax such transactions they can simply amend their domestic law. Domestic taxation is not within the purview of either the OECD or UN.
Interesting point is to see how much Vodafone provided for in the accounts – apart from some obvious inconsistencies, they provided almost double the amount being claimed by the tax authorities – puts the Vodafone 2 case and settlement into perspective for those believing that the settlement granted was larger than claimed by either HMRC and Vodafone.
It was called withholding tax
this case has nothing to do with tax havens, but im not surprised you have tried to turn it into a tax haven argument.
how do you reconcile the above comments with the tax law of almost every other mainstream territory in the world?
If a UK company is owned by a US Inc and the US Inc is sold to someone, then no tax is triggered in the UK. Substitute US Inc for any other territory and you get the same answer, no UK tax due.
substitute UK co for any other mainstream territory which dosent have a non-resident capital gains tax charge and you get the same answer.
the issue here is not tax havens as you well know, but the application of a relatively rare non-resident capital gains tax charge provision in domestic law.
perhaps you are arguing that the UK and the rest of the developed world should introduce a non-resident capital gains tax charge?
I am not convinced UK tax should not be paid when a US Inc sells a UK company
Why on earth not?
Yes I do think a non-resident CGT highly desirable – look at the way abuse of it is distorting property market right now or see Sunday Times tomorrow
Hear hear to that. Seems to me its discriminatory against UK residents that we are taxed on UK capital gains and non residents aren’t. How can UK based entrepreneurs compete effectively when they pay CGT and non residents don’t? The property is in our country, we should tax it!
phil – UK based entrepreneurs can sell shares in uk and non-uk companies without paying CGT via a UK holding company (by using the corporate substantial shareholding exemption) – so it is not true to say that they are at a disadvantage.
to introduce a non-resident capital gains tax in the uk would probably make overseas people think twice about investing in the uk i would think – the reason for the introduction of SSE was to bring the UK into line with most of europe who already had the participation exemption.
But we should abolish SSE anyway – a complete disaster by Brown
i would interested to know why you think that RM, given the rest of europe has an equivalent exemption?
And it should not
That’s my argument
Why should large business enjoy such a destructive exemption designed to feed the fees on City M & S deals
What is the benefit to society?
Richard, you are expressing an opinion about a different situation. SteveT used the example of a USA parent owning a UK subsidiary and the USA parent was sold. The UK subsidiary was not sold.
You opined on the sale of a UK subsidiary by a USA parent, a different example.
What is your opinion about SteveT’s example. If the USA parent was sold and continued to own the UK subsidiary should there be a CGT trigger under the UK tax code given that there has been no disposal of the UK subsidiary by its owner who is the USA parent?
If th US parent was a simple holding company to hold the UK asset then yes – tax is due in the UK in my opinion
That’s called offshore tax planning
I refer you to the Ramsey principle
Also to the GAAR
The offshore ownership of property has little to do with CGT and all to do with the ridiculously high level of stamp duty introduced at Viince Cable’s behest.
Respectfully – I don’t believe you
JayPee is right.
CGT is not an issue for most wealthy non-doms because they can own the property directly and avoid CGT by using the principal private residence exemption.
Oh come on – it’s not just being used for that
Please stop pretending all is so sweet in this world when what you do stinks – and all reasonable people can smell it
I’m confused re your view Richard that UK tax should have been payable on the Vodafone deal. I thought you were criticising the fact that tax wasn’t payable in India. If you think that it should have been payable in the UK, then are you saying that it should not have been payable in India? You seem to be in favour of territorial tax on the one hand, and against it on the other hand. Which is it?
Since I haven’t ever said that I think you’re either a) misunderstanding another answer b) setting up a straw man
why dont you answer stuarts question then – which territory do you think tax should be due in
to take the example of uk owning india and selling it ala vodafone, should the uk company get a tax credit (assuming we take your preference to abolish SSE)?
India
And I have answered the question
That is where the sum was due
If a liability also arose in the UK then it should of course have a credit to prevent double tax
But this is about making sure tax was paid in the right place in the right time – and to me that does not seem to have happened – albeit – and let’s be clear – the gain was as other’s note, by Hutchinson anyway and the odd aspect of this dispute was about withholding, not primary liability so replication is unlikely in other states for now at least
Richard
I think you have forgotten what you wrote when you created this thread.
You said:
“This was a transaction relating to Indian assets that India wanted to tax, and thought it could tax. But it was recorded ‘elsewhere’ in a tax haven structure. And the result is that the legal form of recording it ‘elsewhere’ has meant that Inida’s laws have been subverted and tax is not due. That’s the tax haven issue in a nutshell. Now it is time for the OECD, UN and others to agree how such abuse can be tackled so that transactions are not taxed where there form is but where their substance is.”
So you are clearly criticising the decision which enabled the transaction to avoid being taxed in India, but as its UK company involved (Vodafone), you think the transaction should be taxed in the UK. So do you think that its the UK parent or the Indian subsidiary which should have been taxed?
I think the tax was due in India initially by Hutchinson
But by withholding by the purchaser of the Indian asset if not
As the Indian law intended
Is it really so very hard to work that out?
But if that’s what Indian law intended, why did the Indian court deem otherwise?
It’s also worth pointing out that withholding tax is deducted by the vendor, not by the purchaser.
Read the decision
I think the judgement is wrong
My reasons are published, in India, tomorrow
Quite what the Indian government might do is a complicated matter. It may be that it needs a closely regulated licensing system that embodies a requirement for a licensed operator only to function if it is fully subject to Indian tax on its operations in that country. No tax then no license.
Excellent idea
The Indian government should teach Vodafone a lesson. It should use the next licensing round to strip Vodafone of it ability to operate in Indian and hand Vodafone’s license to a less irresponsible business.
And then the Indian government can kiss goodbye to foreign investment – yes, that will be a pretty smart move.
Anyway, the tax due on the deal was actually owed by Hutchison as it was they who achieved the alleged capital gain.
No one will ignore Indian investment – the market is too big
Really, you seem to be the only person who believes – even the Supreme Court in its judgment called upon the tax administration to legislate laws that give certainty to investors and that investors deserve it as a right.
I know I am not the only person who thinks that