Cairn and Vodafone hope to settle old bills
The Indian government is in talks with Cairn Energy and the Vodafone Group to end the longstanding tax dispute with the two companies. It did so shortly after the Indian government revised the Income Tax Act to end retroactive tax claims.
Finance Minister Tarun Bajaj confirmed the talks in an interview with Bloomberg. He denied that the decision to withdraw the retrospective amendment to the 2012 Income Tax Act was related to the cases.
“We have not been influenced by arbitration proceedings pending in various courts,” said Bajaj. “We want to give foreign investors stability and security in terms of tax rates.”
The Indian Parliament moved to amend the controversial 2012 retroactive tax provision under a 9th bill. The retroactive tax regime allowed the Indian government to assert tax claims until 1962.
At least 17 companies are involved in disputes with the Government of India over retrospective tax claims. These cases could be resolved as this provision has been repealed, but Cairn and Vodafone could be high on the list.
Sources close to the Cairn case have told the press that the company may be open to a lower refund. “Cairn would only want the Indian government to repay the main amount. The company stands ready to abandon the remainder of the award, ”the source said.
Other sources suggested that this was a “significant” cut and that the company would have to accept that “huge discount”.
The Indian government has been in a battle with Cairn and Vodafone for many years. Both cases date back to transactions from more than a decade ago, but several rounds in Indian courts failed to resolve the dispute.
In the end, both cases went to the Permanent Court of Arbitration in The Hague. In September and December 2020, the court ruled in favor of Cairn and Vodafone. However, the Indian government decided to fight back.
Taxpayers have gone back to the negotiating table hoping to finally end the dispute. However, the Cairn and Vodafone cases will continue to be investigated for years due to precedents in Indian tax law.
Cairn
The Cairn case revolves around capital gains tax on a restructured company sold 15 years ago. The Edinburgh-based company restructured its operations in India and in 2006 transferred ownership of its Rajasthan oil field to Cairn India.
As part of the plan, Cairn India acquired the entire share capital of Cairn India Holdings from Cairn UK Holdings in exchange for 69% of its shares. The company argued that this was a corporate reorganization with no tax motive, but the Indian tax ministry saw it differently.
In 2011, Cairn Energy sold most of its stake in the Indian entity to Vedanta Resources for $ 8.7 billion. However, the tax authorities banned the company from selling the remaining 9.8% stake and the government froze Cairn India’s dividend payments to Cairn Energy.
The Indian government retrospectively changed tax rules in 2012 to give itself the power to trace mergers and acquisitions (M&A) back to 1962 if the underlying assets were in India.
In 2014, the tax department argued that the UK oil and gas company owed $ 1.4 billion in capital gains tax on its Indian subsidiary’s IPO on the Bombay Stock Exchange in 2007. The tax authorities would later seize 10% of the shares in Cairn India, valued at around $ 1 billion, for back taxes.
After the matter was not resolved by the Indian judiciary, the Edinburgh-based company filed a dispute under the UK-India investment agreement and filed for international arbitration that began in 2015 for the losses resulting from the expropriation of its minority investment in India.
The Hague Court ruled in Cairn’s favor, but the arbitration award has yet to be carried out.
Vodafone
Much like the Cairn case, the Vodafone case dates back more than a decade to a 2007 deal. One key difference is that the Indian government changed the Income Tax Act in 2012 after the Supreme Court ruled in Vodafone’s favor.
The main question was whether Hutchison’s profits on the sale of an Indian telecommunications network to Vodafone in an offshore stock transfer deal were taxable in India. Vodafone argued its case, claiming that it was under no obligation to withhold tax on its payment to Hutchison.
The position of the Government of India is to tax the profits from offshore transfers as the shares have derived their value from assets located in India. Vodafone Group has been fighting the case for more than a decade, despite the Supreme Court victory.
The Vodafone case is notorious among Indian taxpayers. The case overshadowed the company’s growth plans in India, but other companies began to rethink their investment plans. This would become a key factor in the U-turn in retroactive taxation in August 2021.
The Bharatiya Janata Party (BJP) even accused the government of the Indian National Congress (INC) of unleashing “tax terrorism” against investors. The BJP should come to power in 2014. Many taxpayers hoped that the government would abolish the controversial amendment to the income tax law.
Retrospective taxation has been a controversial tax issue in India since 2012 and it took seven years for the Indian government to change course. The decision of the Permanent Court of Arbitration in September 2020 might have opened up the possibility of new negotiations and accelerated this political change.
However, investor confidence in India will not increase significantly until Vodafone and Cairn have fully resolved their retrospective tax disputes. Much depends on whether the talks with the Indian government are successful.
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