Vodafone fights India's retrospective tax grab
Law change may force telco to cough up
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Vodafone is asking for international arbitration on its claim that the Indian government's attempt to retrospectively apply changes in tax law is illegal.
The law concerned would, if it were retrospectively applied, cost Vodafone dearly as it managed to avoid paying capital gains tax of £1.4bn on its acquisition of Hutchison Essar. Vodafone argues that it would also be in breach of the India/Netherlands Bilateral Investment Treaty, which guarantees fair treatment of investors.
Vodafone acquired Hutchison Essar back in 2007, and for the following four years the company fought the Indian government on the payment of tax on the transaction. Hutchison Essar is an Indian operation, but as neither Hutchinson nor Vodafone are Indian companies they aren't liable for Indian tax, a situation which was clarified by the Indian Supreme Court in January.
Having discovered that it's not legally entitled to the money, the Indian government has set about changing the law with the Indian Finance Bill 2012, with a view to retroactively applying it to Vodafone and thus getting the cash.
Vodafone is a UK company, but its international operations stay with a holding company in the Netherlands, so it's the India/Netherlands treaty which is being tested. That treaty requires that both parties protect investors in their respective countries reasonably, and that they do "not breach [their] legitimate expectations".
So far Vodafone has just filed a Notice of Dispute, which is very much the first step on the road towards arbitration, but it's a fight that most people thought had ended with the Supreme Court ruling in January.
The money involved has more than doubled since the dispute started, thanks to late payment penalties, and it seems that the fight over it will continue for while yet. ®
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COMMENTS
Any form of retrospective law is abhorrent
... but who's going to feel much sympathy for Vodafone ?
Regardless of the morality debate about tax avoidance, retrospective taxation will harm the Indian economy. The UK has had plenty of opportunity to close, restrospectively, tax 'loopholes' (read: legislative f**kups by HMRC's lawyers) but have chosen never to do so. If India continues to pursue it they may find foreign investors find the tax-risk of investing in India to outweigh the cheap labour.
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