Vodafone makes final submissions in the $2Bn Indian Tax case & The China Angle explored.

Vodafone’s takeover of Hutchison’s assets in India gave Indian tax authorities a wake up call and they have been relentless in their pursuit of Vodafone to pay over $2 Billion in taxes.

Vodafone had until March 12 to make their final submissions on the Vodafone India Tax case which have been presented and Vodafone says that they are confident that no tax will be payable on the transaction.

Background:

Vodafone’s disagreement with Indian tax authorities began in 2007 after it paid $11.2 billion to buy Hutchison’s 67% stake in local telecom firm Hutchison Essar, subsequently renamed Vodafone Essar Ltd.

India approved the deal in May 2007. Hutchison controlled its Indian arm through a variety of firms that finally led to a Cayman Islands-registered company. Vodafone bought the Cayman Islands company from Hutchison.

The Indian tax authorities felt the Cayman Islands transaction was essentially a transfer of Indian assets, and Vodafone should have deducted tax at source when it paid Hutchison. Vodafone has said the deal did not fall within the jurisdiction of Indian tax authorities. In 2007 itself, Vodafone approached Indian courts on the issue. In January 2009, the apex court told Vodafone that it was for the Tax authorities to decide on the fundamental question of jurisdiction.

The China Angle: Chinese law may have bearing on the Vodafone Tax Case

China’s move in December to tighten tax laws on the indirect sale of equity in local firms may cast its shadow on this case.

The March 12 deadline is the second attempt by the Indian tax department to carry forward a process that could end in Vodafone being asked to pay withholding tax for its deal with Hutchison. The second attempt started on 31 October 2009, when the Tax authorities sent a show-cause notice to Vodafone asking why it did not have the jurisdictional right to tax the firm.

Soon after this, China issued a circular that stated the country’s tax authorities had clear jurisdiction over indirect sale of equity interests in Chinese resident firms through disposal of shares in a non-Chinese intermediate holding firm. The Chinese tax authorities’ move mirrored the ongoing attempt by Indian tax authorities to bring such transactions within their jurisdiction.