India revives tax on Vodafone

The headline reads "Government revives Rs 14,000 crore tax demand on Vodafone; company may go for arbitration." Crore = $10 million, so that's 140 billion rupees, which converts to about USD $2.6 billion, up a bit from the original $2.5 billion sought by India's tax authority last year, to account for "delayed payment".

The report says "The company could initiate arbitration before international tribunals under the India-Netherlands Bilateral Investment Protection Agreement"--but this was already done early last year, in anticipation of the reassertion of the tax.  In connection with its filing, Vodafone stated:

"The dispute arises from the retrospective tax legislation proposed by the Indian government which, if enacted, would have serious consequences for a wide range of Indian and international businesses, as well as direct and negative consequences for Vodafone."

I wondered at the time about the oddity that Vodafone could draw India into a dispute resolution with the Netherlands in respect of a law that is not yet passed, but noted that apparently once invoked, the BIT automatically provides for dispute resolution.

The latest is merely an assertion by the Indian tax authority, so it remains to be seen whether Vodafone will seek another victory from the Indian courts (challenging the reassessment) or from the BIT (challenging the retroactive law as a breach of fair & equitable treatment to foreign investors).

Latest on Vodafone in India

Vodafone is setting aside some pretty big numbers, notwithstanding the Economist's characterization of the rules as delayed and diluted.

Business in India not taking ball, going home

When India pushed back on tax avoidance after the Vodafone case, lobbyists came out in full force opposition and people predicted investment would flee in the face of the tax reform, while I said that "if U.S. businesses really don't like what India is doing, they have a perfectly viable option, which is to do what they say they are going to do, namely, take their assets and go home.  But they do not want to do that."  This week in the Economist we get confirmation that business is not in fact fleeing India, tax & regulatory state notwithstanding:

At the start of 2012 India offered a cocktail that seemed guaranteed to be lethal for foreign investment: a faltering economy, corruption and political gridlock. In March came the final flourish, the equivalent of the barman spitting into your Death in the Afternoon. A budget was passed that aimed retroactively to tax Vodafone, the country's biggest foreign direct investor, and to clamp down on the holding structures used by most foreign investors, in particular the routing of money through the low-tax paradise of Mauritius.

In April alone, foreigners sold almost $1 billion of portfolio investments...Since April, however, portfolio investors have piled back in ... with net buying of some $5 billion of shares and bonds. This is surprising. There has been no clear improvement in India’s fortunes. Yes, there is a new finance minister and those tax rules have been delayed and diluted (although Vodafone’s fate is still unclear). But the political climate has soured further, lessening the chances of reforms or more prudent fiscal policy. 

The Economist concludes that it is the "resilience" of the firms, and not India's economy, that is responsible.  Maybe so, but it is at least as clear that a government that tries to prevent tax avoidance is not an obstacle to investment.  There is not much discussion of the diluted and delayed tax reform; the last I have seen suggests the matter is still on the table.

 

India's tax avoidance law is making progress

"Despite international pressure to change controversial tax amendments, the lower house of India's Parliament passed the draft 2012 Finance Bill without budging on the Finance Ministry's position on retroactively taxing Vodafone-like transactions involving Indian assets."  Tax Analysts [gated].  Further:

"The tension created by the Vodafone situation has distressed foreign investors as uncertainty mounts concerning the Indian business landscape. The proposed GAAR has sparked fears that tax officials will have too much power to scrutinize any transaction for signs of tax evasion and will be able to sidestep tax treaties with other nations. 

In a gesture that appeared to assuage investor anxiety somewhat, Mukherjee announced on May 7 that the government had amended some of the Finance Bill's proposals, including delaying the GAAR's implementation date for one year and offering taxpayers the opportunity to approach India's Advance Ruling Authority to determine whether a planned transaction would be permissible."

Vodafone has already served a notice of dispute against India through the India-Netherlands Bilateral Investment Treaty.  The notice itself is not publicly available, but the company has said of it:

"The dispute arises from the retrospective tax legislation proposed by the Indian government which, if enacted, would have serious consequences for a wide range of Indian and international businesses, as well as direct and negative consequences for Vodafone. The proposed legislation would also countermand the verdict of the Indian Supreme Court in January 2012, which ruled that Vodafone had no liability to account for withholding tax on its acquisition of indirect interests in Hutchison Essar Limited in 2007.
…
Vodafone believes that the retrospective tax proposals amount to a denial of justice and a breach of the Indian government’s obligations under the BIT to accord fair and equitable treatment to investors."

 I find it odd that Vodafone could draw India into a dispute resolution with the Netherlands in respect of a law that is not yet passed, but apparently once invoked, the BIT automatically provides for dispute resolution.  If the BIT can ultimately prevent the legislature from enacting the new law, that will be big news.

Business to Geithner: more pressure on India

Tax Analysts recently published a letter from the USCIB [gated] and other business groups to Tim Geithner, urging him to step up the pressure on India because apparently their message isn't getting through so far:

We write to thank you for raising concerns in your recent meeting with Finance Minister Mukherjee regarding the proposed Indian tax legislation and to request further engagement in this matter. Unfortunately, pronouncements by Indian officials since that meeting have not allayed the concerns of U.S. and other foreign investors. To effectively address these issues, the proposed legislation needs to be amended. 

The letter lists three changes the business community wants India to make:

1. The proposed legislation will not be applied with retroactive effect, even for the suggested 6-year period.
2. The proposed legislation will not be applied to reverse favorable results already obtained by a taxpayer in a final decision of any Indian court, or in any case assessed and finalized prior to April 1, 2012.
3. The proposed legislation will not be applied in a manner inconsistent with India's obligations under its tax treaties.

(2) is obviously aimed at protecting Vodafone specifically.  It then follows with this:

...If the Indian Government is not prepared to offer legislative amendments providing assurances on these three points at this time, then it should be urged, at a minimum, to adopt a deliberative review and consultation process with all stakeholders prior to enactment...

Fascinating.  "All stakeholders"?  

India's Tax Sovereignty: Tensions Escalate

Tim Geithner did what the US lobbyists wanted, informing Pranab Mukherjee, India's finance minister, that the Americans "have concerns"  feel they have the right to say what India's tax laws can and can't do.    
According to the Economic Times:

"Geithner noted that "certain tax provisions in ... (Budget 2012) have raised significant concern among US industry and dampened enthusiasm about India's investment climate".

From the mouths of BNY, UBS, Goldman, AIG, Apple, etc, straight to the lips of the U.S. Treasury Secretary.

Finance Secretary RS Gujral told the ET that M&A deals like the one Vodafone did in India would have been taxed in other OECD countries and China, and accused Vodafone of treating India like a Banana Republic to avoid paying taxes.  Vodafone responded by saying that it "is completely incorrect to suggest these transactions are taxable in the US, UK or any other OECD member state."  But even if this statement was verifiably correct, so what?  The implication is loud and clear: Vodafone thinks that if there is a "standard" among OECD countries, this represents an international consensus that India really ought to follow:

"In fact, the proposal to tax indirect transfers of Indian companies is without regard to international tax norms and is not in line with the OECD or UN model double-taxation treaty."

But hold on a moment.  International tax norms?  What are those?  Let us remember that the OECD does not include India in its membership, and neither does it include Brazil, Russia, China, or South Africa.  Can you really have an international tax norm if you don't even bother to consult the BRICS?  Moreover, Vodafone had to admit that China has in fact been taxing similar transactions since 2008, in cases that lack business purpose.  I think that might be India's point.  But the larger point is still, so what?  If India determines to create a tax system that differs in some respects or in all respects than the US, the UK, or even every other member of the OECD, under what theory of entitlement does Vodafone or indeed any other company, in India or otherwise, have a say in that decision?

India's government, it seems, thinks the answer ought to be under no recognizable theory whatsoever:

But despite all the criticism, pressure and entreaties, the government has shown no signs of relenting and appears determined to recover taxes from the UK telecom company. 

Go ahead India.  Vodafone is trying to use the India-Netherlands bilateral investment treaty to press the issue.  India and the Netherlands have a tax treaty in force, but presumably it wouldn't help Vodafone because you need a live controversy to get the competent authorities working; just enacting the legislation wouldn't be sufficient.  More latitude under the BIT, perhaps:

Vodafone says the [BIT] covers "indirect investments" and shelters the Hutch-Essar transaction. "Vodafone believes that if the retrospective tax proposals were enacted it would amount to a denial of justice and a breach of the Indian government's obligations under the BIT with the Netherlands to accord fair and equitable treatment to investors."

India: Tim Geithner won't tell you I said this, but I think you ought to keep up the fight.

Is India not entitled to tax sovereignty?

Apparently not, according to the US business lobbying industry.  They're putting pressur on Tim Geithner to put pressure on India as it contemplates enacting that controversial post-Vodafone legislation.  As the FT reports today:

A coalition of large American trade associations – mainly from the technology and financial services sectors – sent a letter to Mr Geithner asking him to “raise concerns” about the tax bill in talks with Indian officials during the spring meetings of the World Bank and International Monetary Fund this week.

...The US Treasury declined to comment on the letter to Mr Geithner. He is slated to meet Pranab Mukherjee, the Indian finance minister, this week on the sidelines of the IMF and World Bank gatherings. Pressure from the US lobbying groups will raise the odds that he will press the matter. 

...The pressure on Mr Geithner comes after George Osborne, UK chancellor, made a public intervention on the matter earlier this month on a trip to New Delhi, chastising the Indian government for its proposed changes and warning of potentially harmful effects on trade and investment. 

So now we see how "tax sovereignty" actually works out in practice.   I've long argued that there is no theoretical or empirical basis for the claim that taxation is intrinsically associated with sovereign status, and that the "soft law" nature of international taxation--enforced coordination to standards developed by powerful players through modeling and peer pressure--demonstrates that tax sovereignty isn't minded at all in practice.  This latest move against India's assertion of its sovereign taxing power is further proof.  Who is responsible for all this pressure?

• The US Chamber of Commerce, headed by Thomas J. Donohue, a self-described aggressive supporter of tax competition;
• The Financial Services Forum, headed by Lloyd Blankfein and a who's who list of corporate tax dodgers, like Gerald Hassel (BNY) Sergio Ermotti (UBS) and Michael Neal (GE); and
• Information Technology Industry Council, with a similarly heavy representation of tax dodgers with lots of experience lobbying for tax breaks, including Fred Humphris (Microsoft), Cathy Novelli (Apple), and Micheal Timmeny (Cisco).

I don't think these folks want to "raise concerns."  I think they want to stop India's democratically elected government from enacting legislation in accordance with its sovereign status as an independent nation, and I find it amazing that they fully expect the U.S. government to help them do that.

This is because of course if businesses really don't like what India is doing, they have a perfectly viable option, which is to do what they say they are going to do, namely, take their assets and go home.  But they do not want to do that.  They want to be able to continue doing business in India at the lowest possible cost to them, and if the Indian government won't play along and give them the tax system they want, these business leaders would like to turn this into a government-to-government conflict so that it is India against the U.S. instead of India minding its own business, writing its own laws, and opening itself to businesses willing to work within its sovereign territory according to its own rules.

Anyone is free to disagree with India's tax policy direction, and anyone is free to express "concerns" about it.  But India's decision belongs to India's people, and it is shameful to see the U.S. business lobby so brazenly insisting on their right to intervene.