In today's Finshots, we talk about the latest ruling on the Vodafone Tax matter and explain the whole case in as few words as possible.

So hold tight. This one is going to get bumpy!!!


The Story

The case begins with Hutchison Telecommunications International Limited. We’ll keep it short and just call this company HTIL. Based in the Cayman Islands, HTIL was a telecommunication giant providing mobile and internet services in countries like Indonesia, Sri Lanka and India. And although this company was the original brainchild, they did not explicitly intervene in matters. Instead, they used buffers. Buffers like CGP Investments Limited.

CGP Investments was another company based in the Cayman Islands but fully owned by HTIL. And CGP had made some big investments, at least on paper. The company owned shares in several Mauritius-based entities who in turn owned stake in certain Indian companies and ultimately held a 67 % stake in Hutchison Essar Ltd. — a joint venture between Hutch and Essar and one of the leading players in the Indian telecom industry.

So technically Hutch (HTIL) was managing its India operations through a web of companies based in Mauritius and the Cayman Islands. Until one day they finally decided to exit the country altogether. They were looking for a buyer and the Dutch-based — Vodafone International Holdings answered the call. They paid $11.1 billion to HTIL and acquired CGP Investments in a bid to take control of Hutchison’s India operations. Hutch Essar became Vodafone Essar. And that should have been that. But then…

The taxman cried foul.

In September 2007, India’s tax department initiated proceedings against Vodafone International Holdings and Vodafone Essar in an attempt to recover around $2.1 billion in taxes. Their contention was simple. This transaction, by all accounts, involved the sale of Indian assets and as such any gains made in the process should have been taxed here, in India. But Vodafone disagreed with this assessment. After all, HTIL sold a Cayman-based company — CGP Investments, to a Dutch based company — Vodafone International Holdings. How on earth could you tax a transaction that involves the sale of a foreign company to a foreign entity? It’s preposterous.

But since tax authorities weren’t relenting, Vodafone approached the Bombay High Court seeking refuge. But the court…

Well, they saw things differently. For starters, it was quite apparent that CGP did not have an independent existence. Hell, it did not even have a bank account. So really, any entity that’s buying CGP isn’t actually interested in the shares of CGP, but all the things that come with it. And to this effect, the court argued that the sale of CGP Investments was not adequate in itself to achieve the object of consummating the transaction. The transaction was only complete when all the rights and entitlements of Hutchison’s Indian assets were transferred. And as such, the tax authorities had every right to purse Vodafone, it said.

Vodafone however, did not relent. The company approached the Supreme Court where the discussion largely revolved around one subject— Was this a deliberate case of tax avoidance or was it simply prudent tax planning? After all, if Vodafone had designed the transaction in a deliberate ploy to avoid taxes, they could be held liable. But if they could prove they had simply executed the transaction without ill intention, maybe they’d get some reprieve. And after lengthy deliberations, the Supreme Court opined that the sale did not amount to tax avoidance. The judges ruled that Vodafone no longer had to pay taxes on this transaction and that should have been the end of this conversation.

But then, the government did something quite unpredictable. They introduced a new tax bill amending existing regulations all in an attempt to force Vodafone to pay up their “alleged” dues. It was retrospective legislation— meaning it gave tax authorities the leeway to reassess transactions dating back to 1962. And the amendments only affected parts of the tax code that allowed the Supreme Court to interpret the matter the way it did. So technically, if the matter went to court once again, the judges would be forced to rule against Vodafone.

And that meant, the company only had one option left. To pursue this case in an international court.

Vodafone approached the permanent court of arbitration at Hague contesting that the amendment of the tax code amounted to a gross violation of fair and equitable treatment promised under two separate Bilateral Investment Treaties (BIT)— The India-Netherlands BIT and the India-UK BIT.

It took them a while, but in the end, the international court ruled in favour of Vodafone arguing that India had breached the terms of the agreement and it must now stop efforts to recover the said taxes from the company.

So does this mean, the tax authorities can no longer pursue Vodafone?

Well… We can’t say for sure.

See, the international court also ruled that the government had to turn over the ₹45 crores they’ve collected so far (from Vodafone) and further compensate them for all the charges borne at the tribunal. That’s another ₹40 crores. So technically they might appeal the decision in one of those appeal courts. Or they could simply choose to not honour the verdict at all. After all, India has always contested that a tax demand such as this cannot be adjudicated by a foreign court i.e. If the legislators decide to pass a law, then all entities within the state are bound to honour it. Foreign courts have little jurisdiction here.

The only downside is that if the government disregards the ruling entirely, India’s place as an enticing investment destination might forever be damaged beyond repair. So what do you think?

Will the government finally relent? Or will they fight this one more time?

Let us know your thoughts on Twitter

Share this Finshots on WhatsApp, Twitter, or LinkedIn.

Also you can check our daily brief here. In today's issue we talk about Google's anti-trust case, Spotify's podcasts, and an out of the world marketing campaign. Do read the full draft:)

Until next time...