Thursday, May 10, 2012

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.

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