TAX NEWS - JUNE 2010

Vodafone faces new phase in tax battle

by Joe Leahy, 01 June 2010 -- Vodafone's long-running $2bn battle with Indian tax authorities over an acquisition it made three years ago looks set to head back to court after India's Income Tax Department served it a new notice yesterday.

The Supreme Court in January last year ordered the tax department to reexamine the case, which centres on whether Vodafone should have paid tax on its $11bn acquisition of Hutchison Essar, India's third largest mobile phone operator, in 2007.

"The Supreme Court granted Vodafone the right of appeal to the Bombay High Court if we disagree with the tax authorities' determination," Vodafone said in a statement yesterday. People familiar with the matter said it was likely to appeal against the notice immediately.

India's tax department argues that even though Vodafone was the buyer and Hong Kong's Hutchison was the seller of Hutchison Essar, the UK group should have withheld an estimated $2bn of capital gains tax on the deal on the government's behalf.

Vodafone has countered by saying the sale of shares took place overseas between offshore companies, which under past practice would have exempted the transaction from Indian jurisdiction.

Under the Hutchison Essar sale, Vodafone International, a Dutch company controlled by Vodafone, paid the $11bn to a Cayman Island entity run by Hutchison for another Cayman Island company that indirectly held a controlling stake in the India-based mobile operator.

Vodafone lost an earlier case in the Bombay High Court challenging the tax department's right to assess it for tax on the transaction and had appealed to the Supreme Court.

The Supreme Court in January last year ordered that the case first be returned to the tax department, which should determine whether it did in fact have the jurisdiction to tax Vodafone in the Hutchison Essar deal.

"Vodafone remains fully confident that no tax is payable by Hutchison on this transaction and that Vodafone has no liability in any event; and all of the taxation and legal advice received continues to be consistent with this view," Vodafone said yesterday.

In an apparent bid to try another tack, the tax department yesterday also issued a show cause notice to Vodafone International asking it why it should not be made an "agent" of Hutchison, and therefore liable to tax.