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.