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Vodafone decision is ‘good news’ for a host of other multinationals

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Vodafone’s victory in the Indian Supreme Court last Friday came as a ‘huge relief’ to the group and to ‘a host of other large multinationals that have undertaken similar deals’, said Kevin Phillips, corporate tax partner at Baker Tilly.

Phillips said the case centred on the fact that, under its domestic law, India is entitled to levy capital gains tax on foreign investors when assets situated in its territory change hands.

‘As this transaction was carried out between two non-Indian companies, outside India, and the sale was of shares in a Cayman company, Vodafone took the view that India had no jurisdiction to tax the gain that arose for Hutchison Telecom,’ he said. ‘Most international tax advisers took the same view, so it came as a huge shock when India asserted that nonetheless, it had the right to tax the gain arising.’

But the Court ruled that Vodafone had no liability to account for withholding tax on its acquisition of interests in Hutchison Essar Limited (now Vodafone India Limited) in 2007.

Vodafone CEO Vittorio Colao said the decision underpinned the group’s confidence in India. ‘We will continue to grow our Indian business – including making significant investments in rural areas and in 3G network coverage – for the benefit of Indian consumers,’ he said.

The ‘right call’

Analysts saw the decision as ‘vindication for one of India’s largest foreign investors’, the Financial Times reported.

The FT's Lex team also noted that the decision was ‘good news’ for a ‘backlog’ of other companies awaiting similar appeals.

Under the headline ‘Vodafone – right call’, they wrote: ‘Essentially, the Indian authorities wanted Vodafone to pay capital gains tax when it took control of the Indian assets. Those assets, though, were owned ultimately by a Cayman Islands company. As Vodafone used a Dutch vehicle to buy shares in the Cayman company, legally, the deal was merely foreign companies completing a foreign transaction – something India had no right to tax. It is easy to deride the episode and think tax has been avoided on a technicality, but the ruling is a good one.’

Next week’s Tax Journal will include expert analysis of the decision.