Milestones: Vodafone-India Dispute Casts Doubt On Tax Havens Future


By Ronald Fink

Cross-border dealmakers are anxiously awaiting the outcome of a long-running tax battle between UK telecom giant Vodafone and the Indian government.

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The dispute dates back to February 2007, when Vodafone acquired the assets of Hutchison Telecom International’s Indian subsidiary, Hutchison Essar, for $11.1 billion. Depending on the outcome, experts say, the case could force multinational companies to turn holding companies located in tax havens into treasury centers or other operations that serve a substantial business purpose.

Because the Hutchison holding companies that owned Essar were based in the Cayman Islands and Mauritius, the deal would not normally be subject to tax by the country in which Essar operated. But that didn’t stop the Indian authorities from imposing a tax of $2.5 billion on Vodafone. They contended that the Hutchison subsidiaries were sham companies that served no purpose other than to avoid tax on the deal.

Vodafone sued to block the government but lost in a court in Bombay in December 2008. And although the decision was overturned by the Indian Supreme Court in January of last year, the Indian parliament then enacted a law that nullified the decision. The government last fall said it would not impose the law retroactively but nonetheless issued  Vodafone another bill for the liability earlier this year. As this issue went to press, Vodafone was reportedly in talks with Indian officials to settle the matter.

Other multinationals that face similar treatment over deals in India include AT&T, E-Trade, General Electric and SABMiller. Germany and China are taking similar action with deals involving holding companies in tax havens.

To fend off such action, multinationals may have to demonstrate that their holding companies have employees working at the acquiring entities, that the entities have “sufficient” capital, and that they keep separate books and records.

“The legal and tax environment post-Vodafone is uncertain,” says Jonathan Babu, international tax manager for CBIZ MHM, a US advisory firm. “We have counseled clients that it is inadvisable to engage in cross-border transactions without ensuring the entities involved in the transaction have adequate economic substance.”