Vodafone Serves Notice of Dispute against Indian Tax Law

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					Vodafone Serves Notice of Dispute against Indian Tax
Law

(Sunnyvale, CA) – India’s plans to introduce amendments to its tax laws that include powers to retroactively overturn
recent court rulings has sparked off a new contention between the government and Vodafone with the
telecommunication company challenging the new retrospective tax legislation.

Vodafone has served a Notice of Dispute against controversial proposals included in the Indian Finance Bill 2012
which allows the government to change tax laws retroactively as well as the power to reverse Supreme Court rulings
and judgements.

Background

In a landmark case in January 2012, the Supreme Court ruled that the Indian tax authorities have no jurisdiction to
tax Vodafone’s $11.2 billion acquisition of the Indian cellphone company from Hong Kong's Hutchison Whampoa Ltd
because it was structured as a transaction between two foreign entities. The Supreme Court further asked the Indian
tax department to refund the 25 billion rupees ($500 million) that Vodafone had deposited, along with 4% interest.

In the Vodafone case, the deal, struck in 2007, was structured as a transaction between Vodafone’s Dutch subsidiary
and a Cayman Islands-registered subsidiary of Hutchison Telecommunications International Ltd (HTIL) as the
purchaser of the 67% stake in India based Hutchison Essar. India’s Supreme Court ruled that the deal is not subject
to capital gains tax, which means that Vodafone had no reason to withhold tax. The court disregarded the fact that
the main asset changing hands was a controlling interest in an Indian telecom company.

Amendment to India Finance Bill

With an aim to prevent such foreign transactions which are commonly undertaken for foreign investment in India,
the Finance Bill states that “an asset or a capital asset being any share or interest in a company or entity registered
or incorporated outside India shall be deemed to be and shall always be deemed to have been situated in India if the
share or interest derives, directly or indirectly, its value substantially from the assets located in India”.

Fearing that this provision in the Finance Bill will overturn the Supreme Court's verdict, the Dutch subsidiary has
issued a Notice of Dispute which could involve international arbitration proceedings as per Netherlands' Bilateral
Investment Treaty (BIT) with India.

Vodafone International Holdings BV being a Netherlands subsidiary qualifies as an investor according to the treaty
principles. Vodafone is arguing that the Indian government is in breach of the treaty’s principles which includes fair
and equitable treatment to investors. Therefore, it is urging the Indian government to abandon or suitably amend
the retrospective aspects of the proposed legislation. However, if the government did not oblige, the company said it
would initiate investment treaty arbitration proceedings under the BIT.

Proposed Amendments to Tax Evasion Laws

In light of this development, the Indian government recently announced amendments to the Finance Bill specifically
to the retrospective measure of the tax evasion law. It clarifies that the retrospective amendments which are under
consideration of the Parliament of India won’t be used to reopen cases where assessment orders have already been
done. Also, the benefits will not be applicable to Vodafone like cases which involve low tax and non-DTAA
destinations like Cayman Island. The amendment also clarifies that the tax evasion law will be applicable only to
specific cases where a transfer is facilitated through a low tax or no tax jurisdiction which does not have a Double
Taxation Avoidance Agreement (DTAA) with India.

Please call or email for more details.

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Description: Vodafone has served a Notice of Dispute against controversial proposals included in the Indian Finance Bill 2012 which allows the government to change tax laws retroactively as well as the power to reverse Supreme Court rulings and judgements.