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7/27/2019 India - Vodafone SC Webinar Slides Taxand

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VODAFONE THE FACTS AND HIGH COURT RULING

HutchTelecommunication

International Ltd(HTIL)

Vodafone

CGP Investments Limited (CGP)

Hutchison Essar Limited (HEL)

India

12 intermediate holding companies

Mauritius / India

Netherlands

Cayman Islands

Share PurchaseAgreement (SPA)

for shares of CGP

100%

Direct and indirectshareholding in HEL - 52%

Other Indian

entities

Indirect shareholding inHEL15%

Direct and indirect shareholding of 52%

+ Options over the indirect shareholding of15% of Other Indian entities in HEL

= Economic interest of 67 percent(approx) in HEL transferred to Vodafone

Decision of the Bombay High Court (HC)

Essence of the transaction was a change inthe controlling interest of HEL, which

constituted a source of income in India

Transaction had significant nexus with

India; hence withholding tax provisions

applicable

Several other rights transferred besides the

CGP share - the consideration should beallocated over such rights also


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VODAFONETHE FACTS (CONT)

The consideration of USD 11.08 billion paid by Vodafone was for the following

52 percent direct and indirect equity sharehold ingin HEL Contro l premium

Useof rights of the Hutch brandin India

A non-com pete agreementwith the Hutch group

Value of non-voting, non-convertible preference shares

Value of loan obl igat ions

Entit lementsto further acquire 15 percent ind irect interest in HEL

Quest ion beforethe Supreme Court of India (SC) Whether capita l gains ar ise from

the sale by a non-residen t of the share capital of CGP, a foreign entity , wh ich h eld

underly ing Indian assets?


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Vodafone In the absence of fraud, India to respect corporate identity and corporate veil

cannot be lifted (unless the law is specifically provides so)

Regulatory provisions mandate investment in telecom sector only through acorporate structure; it could not be disregarded by lifting of corporate veil

Revenue Existing provisions to be construed purposively

The transaction was an artificial tax avoidance schemeSC Separate legal existence corporate structures ordinarily to be respected

Reasonable business purpose test - holding structures to be ignored, if indirecttransfer results from abuse of organization form / legal form

Concept of participation in investment relevant, other considerations to be borne

in mind to determine abuse

The onus to identify and establish abuse lies on Revenue

International holding company structures set up for commercial reasons

Difference between having power and persuasive position on the subsidiary

HOLDING STRUCTURES


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Vodafone Language of section 9 does not create look through provisions

Words indirectly and through appearing in section 9 do not make transaction

taxable, unless capital asset situated in India (in this case the Cayman IslandsCompanys share was situated outside India)

In a transaction between two foreign entities source of income cannot be tracedback to India to establish nexus with India

Revenue Section 9 to be construed in a wide manner; intent of the transaction to be seen

Consideration paid for property rights in India which created a source of incomefrom India

Situs of CGP share can only be in India as the entire business purpose of holdingthat share was to assume control in Indian telecom operations, the same wasmanaged through board of directors controlled by HTIL

SCOPE OF SECTION 9 AND DETERMINATION OF

SITUS OF SHARES


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SC Section 9(1) a legal fiction, and cannot be expanded by giving purposive

interpretation

It does not envisage look through provisions

Scope of income arising from transfer of capital assets which is dependent onthree elements - transfer, existence of capital asset and situation of such asset inIndia

The word indirectly used goes only with income; not capital asset

Specific provision in the Direct Taxes Code Bill, 2010 (DTC) deals with taxation

of indirect transfers

Source of income is where the transaction of sale takes place; and not where the

value lies

A share is situated where the company is registered and the register of membersis kept; and not where the underlying assets are situated

SCOPE OF SECTION 9 AND DETERMINATION OF

SITUS OF SHARES (CONT)


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Vodafone Hutch holding structure existed since 1994

Complex corporate structure evolved for good commercial reasons, recognized byIndian tax and regulatory laws

Revenue CGP share was interposed at the last minute to avoid tax in India

SC Principle of internal correlation: Every multinational company reconfigures itselfinto a corporate group by dividing itself into a number of subsidiaries which are

financially interlinked

Court(s) have evolved doctrines like piercing the corporate veil, substance overform etc; however, genuine tax planning cannot be ruled against by the Court(s)

CGP was an investment vehicle; sale of shares of CGP was more efficient way ofensuring a smooth transition of business. It cannot, therefore, be said that CGP

had no business or commercial purpose

ROLE OF CGP IN THE TRANSACTION


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Vodafone No transfer of controlling interest independent from transfer of shares

Controlling interest cannot be taxed in the absence of express legislation

Revenue The entire purpose of transferring the CGP share was to transfer control in HEL

Controlling interest is a property right the transfer of which is taxable in India

SC The Vodafone transaction held to be an investment to participate instead of a tax

avoidance transaction; difference between power and persuasive position

Reason for execution of the SPA was to provide exit to Hutch

Controlling interest in the management of the company - not an identifiable ordistinct capital asset independent of the holding of shares

Tax is to be levied on the transaction ie share sale and not on its effect

Method or basis of valuation of shares cannot be a basis of taxation

CONTROLLING INTEREST AND OTHER RIGHTS

AND ENTITLEMENTS


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SC Bargain was for sale of CGP share and not an itemized sale transaction

Options entitling Vodafone to 15 percent indirect holding in HEL do not constitutea property right or equity interest until exercised

CONTROLLING INTEREST AND OTHER RIGHTS

AND ENTITLEMENTS (CONT)


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Vodafone Indian Parliament has legislated on form; the Court(s) cannot get into the

substance of the transaction

Concept of substance over form has been rejected by SC in case ofAzadiBachao Andolan (ABA)

Tax recognizes form and decoupling as a part of bonafide transnationalstructuring

Revenue Real intention should be looked upon

Reliance to be placed on SC decision in the case of McDowell ABA incorrectlydecided, should be reconsidered

SC There is no conflict between McDowell and ABA and the latter did not require anyreconsideration

Court(s) not compelled to look at a document or transaction in isolation and thelegal nature of the transaction should be discerned by looking at the entiretransaction as a whole and not by adopting a dissecting approachthe look atapproach guidance taken from English cases

AZADI BACHAO ANDOLANREGARDING TAX

AVOIDANCE


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Vodafone Reliance placed onABATax Residency Certificate (TRC) conclusive evidence

even for investors who invest through the Mauritius route

Revenue Enquire to check whether capital gains beneficially and legally belong to aMauritian entity or to a third party ie whether the Mauritian company is a merefaade

SC Per Justice Radhakrishnan

Valid TRC, in the absence of a Limitation Of Benefits (LOB) clause, conclusiveas regards the residence and beneficial interest / ownership

However, Revenue not precluded from denying the treaty benefits, ifestablished that the Mauritius company had no commercial substance and hadbeen interposed solely with a view to avoid tax or for tax evasion

VALIDITY OF MAURITIUS TAX RESIDENCY

CERTIFICATE


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Vodafone Section 195, referring to withholding from payments to non-residents, cannot be

enforced on a non-resident not having any taxable presence in India

The words any person in section 195 should be used sensibly, else the

enforcement of the provision would be impossible

In the absence of income chargeable to tax, tax not required to be withheld

Revenue The term person widely defined to include a foreign company

Section 195 applicable when the taxpayer has some of nexus with India,irrespective of deductor being a non-resident

Once the nexus is shown to exist, the provisions would operate

SC Applicability of section 195 depends on the tax presence of the non-resident

payer in India - tax presence must be construed in the context of the transactionunder question

Per Justice Radhakrishnan section 195 does not apply to non resident payors;does not have extra territorial applicability

WITHHOLDING TAX


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SC Investment by a group company in an Indian company does not create a tax

presence of all companies of that group in India

In the absence of chargeability to tax, nothing could be recovered from thedeemed agent under domestic tax laws

Merely treatment as an agent, would not lead to an automatic liability to pay taxeson behalf of the non-resident

WITHHOLDING TAX (CONT)


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SC

observations

Tax avoidance is a problem faced by almost all countries following civil and

common law systems and all share the common broad aim to combat it

Vodafone case an eye-opener of what India lacks in regulatory laws and whatmeasures India has to take to meet the various unprecedented situationswithout sacrificing national interest

The DTC envisages to create an economically efficient and effective direct tax

system by proposing a GAAR

Certainty is integral to rule of law - the basic foundation of any fiscal system

Tax policy certainty is crucial for taxpayers (including foreign investors) to makerational economic choices in the most efficient manner

NEED FOR LEGISLATION AND CERTAINTY


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Binding nature of the concurring but separate judgment of Justice Radhakrishnan

Substance vs form - will TRC remain a conclusive proof of residency?

Future for Mauritius investors

Applicability of withholding tax provisions in future M&A/Private Equity deals

Applicability of this ruling to other similar transactions

Relevant guidance by the SC on the need, scope and application of GAAR

Provisions of the DTC relating to indirect transfers a game changer?

What to expect in the Finance Bill, 2012?

BMR ANALYSIS


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Considerations to be borne in mind to determine if there is an abuse

(i) the concept of participation in investment

(ii) the duration of time during which the holding structure exists

(iii) the period of business operations in India

(iv) the generation of taxable revenues in India,

(v) the timing of the exit

(vi) the continuity of business on such exit

These considerations relate to an investment to participate in India which is conceptually different

from a pre-ordained transaction which is created for a tax avoidance purpose

OTHER CONSIDERATIONS

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