RECENT FOREIGN

TAXATION ISSUES

GGI ASIAN CONFERENCE,

ITPG MEET,
BEIJING, CHINA
OCTOBER 2010
 VODAFONE JUDGEMENT
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The tax department had raised a demand for US$ 2.6

billion as tax on the Vodafone-Hutch deal in 2007
In 2007, Vodafone Group bought the Indian telecom
assets of Hong Kong's Hutchison Telecommunications
International Ltd. It paid US$11 billion for a 67% stake
in Hutchison Essar. Hutchison, the seller, made huge
capital gains.
The Supreme Court on 27th Sept 2010 refused to offer
any immediate relief to Vodafone, which has challenged
the Bombay high court order allowing the government
to tax the company’s deal with Hutch
 VODAFONE JUDGEMENT CONTD.
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The moot issue is whether transfer of effective

control of Indian assets thru transfer of shares
outside India of foreign companies can be taxed in
India.
The issue is all the more complicated due to the web
of holdings and companies involved.
VODAFONE JUDGEMENT CONTD.
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 VODAFONE JUDGEMENT CONTD.
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The Bombay High Court’s 8 September judgement

upholding the income tax department’s right to tax
the deal has made life difficult for the department by
allowing tax only on the part of the transaction that
has an Indian “nexus”, rather than the entire
transaction value.
The Supreme Court has directed the tax department
to evaluate the quantum of tax as per the Bombay
HC order.
 VODAFONE JUDGEMENT CONTD.
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Vodafone is resisting the demand because if it pays as

per the $2.6-billion demand raised by the IT
department, it won’t get the refund because Hutchison
Telecommunications (the seller) has exited India after
the sale.
The Department is imposing the liability under the
witholding tax provisions on Vodafone.
The Bombay HC judgement has set a precedent that
change of ownership of Indian assets at the hands of
foreign owners, in foreign shores, is liable to tax in
India.
 VODAFONE JUDGEMENT CONTD.
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Other cases directly impacted by the judgement:-

 US$ 200 mil in the Mitsui-Vedanta deal to Vedanta for
acquisition of shares of Sesa Goa
 US$ 10 mil in Tata-AT&T deal to Tatas for Idea
Cellular
 US$ 10 mil in Indian Rayon-AT&T deal to Indian
Rayon for Idea Cellular
 US$ 13 mil in SABMiller-Foster deal to SABMiller for
Foster’s India
 US$ 145 mil in Sanofi Aventis-Merieux deal to Sanofi
Aventis for Shantha Biotech.
 POSITION UNDER THE DTC 2010
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The current ambiguity will remain until the

proposed new Direct Tax Code (DTC) which provides
for tax on indirect transactions (even overseas)
relating to assets.
The Finance Minister has tabled the Direct Taxes
Code, 2010 (DTC 2010) in the Parliament on 30
August 2010 which is proposed to come into force on
1 April 2012
Some of the new concepts introduced under the DTC
have been briefly discussed.
 CFC RULES INTRODUCED IN DTC 2010
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CFC rules have been incorporated to provide for the taxation of income attributable
to a CFC to be taxed in the hands of the resident as gross residuary income.
A foreign company would be considered as a CFC which
 for the purposes of tax is a resident of a country or territory with a lower rate of tax, where the
amount of tax paid in that country or territory in respect of the profits accruing is less than half of the
corresponding tax payable on those profits computed under DTC;
 the shares of the company are not traded on any stock exchange recognized by the law of the
territory;
 one or more persons individually or collectively exercise control over the company through specified
percentages by way of ownership of shares, or over assets or income of the income, or exercise
dominant influence, or exert a decisive influence in a shareholder meeting;
 it is not engaged in any active trade or business and 50 percent or more of its income is of the nature
of dividend, interest, income from house property, capital gains, royalty, annuity, income from sale
or licensing of intangible property, income from sale of goods or supply of services to associated
concerns, income from management, holding or investments in financial assets etc;
 the specified income exceeds Rs 2.5 million.

CFC rules would override the provisions of a tax treaty.

 BRANCH PROFIT TAX IN DTC 2010
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It is proposed that every foreign company would be liable

to Branch Profit Tax (BPT) in respect of the profits in a
financial year.
This tax shall be in addition to corporate income-tax
payable.
Branch Profits would refer to income directly or
indirectly attributable to the permanent establishment or
to an immovable property situated in India and included
in the total income of the foreign company, as reduced by
corporate income-tax payable on such income.
BPT would be chargeable at 15 percent.
 GAAR IN DTC 2010
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General Anti Avoidance Rules (GAAR) would be applicable to both domestic

and international arrangements where such arrangement’s (in part or in whole)
main purpose is to a obtain a tax benefit and has been entered or carried on in a
manner not normally employed for bona-fide business purposes or is not at
arm’s length or abuses the provisions of the DTC or lacks commercial substance.
It is additionally proposed that an arrangement would be presumed for
obtaining a tax benefit which would result in reduction in tax bases including
increase in loss.
The tax payer would be required to prove that the obtaining the tax benefit was
not the main purpose of the arrangement.
In accordance with the revised discussion paper on the DTC-it has been
provided that the provisions would apply in accordance with such guidelines as
may be prescribed by the Central Government.-the forum of Dispute Resolution
Panel would be available where GAAR provisions are invoked.
GAAR would override tax treaty provisions
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THE END
Contact: raghu.m@rnm.in