Vodafone Moves Toward Arbitration on India Tax

MUMBAI, India (AP) — Vodafone took the first step toward seeking international arbitration of a dispute with the Indian government over a proposed retroactive tax law that could cost the British telecom giant billions of dollars.

Vodafone’s Dutch subsidiary served a notice of dispute to India’s prime minister and other top officials Tuesday, arguing that a proposed retroactive tax on overseas transfers of Indian assets violates legal protections granted to international investors, the company said in a statement.

“Vodafone has asked the Indian government to abandon or suitably to amend the retrospective aspects of the proposed legislation as Vodafone would prefer to reach an amicable solution to this matter,” the company said. “However, if the Indian government is not willing to do so, Vodafone will take whatever steps are necessary to protect its shareholders’ interests, including commencing investment treaty arbitration proceedings.”

The tax legislation, which must still be passed by Parliament, would make transactions like Vodafone’s $11 billion acquisition in 2007 of the Indian telecom assets of Hong Kong’s Hutchison Telecommunications taxable. It would effectively overturn the Supreme Court of India’s January ruling that Vodafone is not liable for up to $4.4 billion in back taxes and penalties on that deal.

GE, SAB Miller, Cadbury, AT&T, Sanofi, and Vedanta are among the companies fighting tax cases in India that could be affected by the change.

Vodafone’s latest effort to avoid paying tax on the deal hinges on a bilateral treaty between India and the Netherlands that offers investors some protections.

Vodafone, now one of India’s leading telecom players, entered the Indian market in May 2007, when its Dutch subsidiary acquired a 67 percent stake in CGP Investments Ltd., a Cayman Islands company which held the India telecom assets of Hong Kong’s Hutchison Telecommunications International Ltd.

Vodafone maintains that it did not owe tax because it was the purchaser and the transaction took place between two foreign entities.

India’s government was widely expected to make such transactions taxable under India’s new tax code. What has shaken foreign investors is the government’s move to make them taxable retroactively.

Industry groups representing 250,000 companies across North America, Asia and the U.K. warned India’s prime minister this month that the proposed tax is causing foreign businesses to reconsider investing in India. The International Chamber of Commerce and a business advisory committee to the OECD also wrote to India’s finance minister, warning that a retroactive change would discourage investment.

India’s commerce minister, Anand Sharma, defended the proposed tax, claiming it would not hurt foreign investment, after meeting in London with Britain’s Chancellor of the Exchequer George Osborne.

“The clarificatory amendment is retrospective in character and it was not Vodafone-specific,” he told the Press Trust of India on Tuesday. “We have a very stable tax regime and policy regime which is judicious.”

Erika Kinetz, Associated Press

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