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Update - India's Tax Amendments Overturning Vodafone Case - by Marc Desrosiers 

Global Tax Adviser

 

September 04, 2012

 

Marc Desrosiers
National Leader, International Corporate Tax

 

In a series of recent rulings, the Indian Authority for Advance Tax Rulings has determined that international share transfers were subject to India's transfer pricing and minimum alternative tax provisions, even though capital gains realized on the transfers were exempt from Indian taxation under a treaty. While these rulings are only binding on the taxpayers involved, Indian tax authorities and courts may rely on these rulings. When considered with the proposed legislation introduced by the Indian government in March 2012 to retroactively overturn the January 2012 Vodafone decision and tax indirect share transfers, it appears that India's ability to tax international share transfers may be broader than may have originally been thought.

Background
In 2007, Vodafone acquired controlling interest in Hutchison Essar, one of India's largest mobile telecoms operators, from Hutchison Telecoms International at a cost of nearly US$11 billion. In fact, the transaction entailed Vodafone's Dutch subsidiary acquiring a majority stake in a Cayman Islands registered company which, through a maze of other subsidiaries, held the Indian telecom assets of Hutchison. No shares of any Indian company, however, were transferred as part of this transaction. Despite this, the Indian tax authorities presented Vodafone with a demand for taxes in excess of US$2 billion.

 

In the Vodafone case in January 2012, the Supreme Court of India ruled in favour of the taxpayer that the Indian tax authorities did not have territorial jurisdiction to tax the taxpayer's offshore transaction and that the taxpayer was not liable to withhold Indian taxes. The Supreme Court of India decision reversed a lower court decision that had found in favour of the Indian tax authorities.

 

In its March 2012 budget, the Indian government reacted and introduced significant legislative changes affecting international taxation and cross-border transactions, including a retroactive amendment to the rule that deems certain income to have arisen in India and also proposed general anti-avoidance rules (GAAR). The proposed legislative changes would, among other things, make all indirect transfers of Indian assets, including transactions like the Vodafone purchase, liable to Indian tax.

 

Recent developments
The Indian Authority for Advance Tax Rulings recently gave three separate opinions that, even though the capital gains realized from international share transfers were exempt from Indian taxation under a treaty, they were still subject to India's tax provisions. All three rulings involved the application of the India-Mauritius tax treaty, and found that the transactions under review were subject to India's transfer pricing provisions. Two of the three rulings also determined that India's minimum alternative tax provisions also applied to the foreign company (transferor).

 

Perhaps in recognition of the potential negative effect that these developments may have on India's ability to attract foreign investment, the Indian government has postponed the proposed GAAR regulations by one year. However, India has not made changes to the retroactive amendments relating to the indirect transfer of assets.

 

It is also not clear what, if any, effect the rulings will have on proposed legislative changes.

 

Details on India's proposed legislative amendments can be found in the July 2012 edition of "Frontiers in Tax". Further details regarding the rulings can be found in KPMG Global-TaxNewsFlash, "India - Although share transfers not taxable, transfer pricing provisions apply", dated August 28, 2012.

 

For more information, contact your KPMG adviser.

 

 

 

 

 

 

Information is current to September 04, 2012. The information contained in this Global Tax Adviser is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.

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