The first to hit the catwalk at the Miss World Tax beauty contest that spanned year-end was Lady Justice New Zealand with a December 12 landmark tax avoidance decision. Following close on her high-tax heels on December 19 was Lady Justice Canada with an insight into the application of the General Anti-Avoidance Rule and only a day later Lady Justice Denmark strutted along with her first Beneficial Ownership Case. But the most stunning of them all exploded onto the runway on January 19 with all the self-confidence of an odds-on favorite.
Lady Justice India’s Vodafone case has eclipsed just about everything else in the international tax world over the last ten days. “Her justice system has been gloriously vindicated,” her sponsors effused, omitting to mention that the Supreme Court had just totally laid waste a number of orders of the Bombay High Court at the end of a four and a half year legal battle that had cost countless rupees and substantially any remaining goodwill towards the Indian taxation system. A closer inspection, following removal of the Lady’s blindfold, revealed two heavily bruised eyes.
I do not propose to delve deeply into the details of the case which has received wall-to-wall coverage (if you have a free evening, google: india, vodaphone, supreme court, duh-which-words-in-the-law-didn’t-you-understand-?) but , in a nutshell, for those who have been more concerned with trifling matters such as Iranian sanctions and the US election it went like this:
A Cayman Island subsidiary of the Hong Kong based Hutchinson Group sold its shares in another Cayman Island company to a Netherlands subsidiary of the UK based Vodafone group. It just so happened that somewhere way down the chain under the purchased Cayman Island company was an Indian company with a gargantuan Indian mobile phone business. The Indian tax authorities were not terribly pleased that they had missed the chance to tax Hutchinson on the capital gain on sale of the Indian business that they claimed would have applied had the Indian company been sold directly (but that is a whole new story that we will not go into here), so decided to slap a $2.5 billion tax bill on – wait for it – Vodafone, for not having withheld the required Indian tax when paying for the Cayman company.
Now, for people like me with warped tax-drugged minds this did not, when the case originally saw the light of day, come over as quite as moronic as it must sound to normal human beings who do not drool at the mouth. An albeit diminishing number of countries do still allow the taxation of the sale of indirect holdings in their jurisdictions and, indeed, the strict enforcement of withholding tax obligations on a payer, including criminal penalties for non-compliance, is regularly a cornerstone of, at least domestic, tax collection policy.
The problem is that, now that the dust has settled, clearly none of this applied to India. The judgment was quite simple really – every single one of the tax authorities’ claims was rejected and the orders of the Bombay (should that, politically correctly, be Mumbai?) High Court were emphatically overturned. I am no expert in Indian tax law but, reviewing the Supreme Court decision, it did seem to be almost a case of just joining up the dots. The tax authorities may be forgiven (although I would not agree) for begrudging $2.5 billion slipping between their fingers but I fail to begin to understand what happened in the Bombay (Mumbai) High Court.
There are several reasons why India is a highly favored location for investors today. None of them relate to taxation or the legal system. The tax system is antiquated and rates are too high. The proposed new Direct Tax Code leaves much to be desired. Bureaucracy is horrendous and, as Vodafone discovered, even the Bombay/Mumbai High Court couldn’t be relied on to get it vaguely right.
In his award-winning novel “Midnight’s Children” set around India’s first thirty years of independence Salman Rushdie’s hero, Saleem Sinai, says “No people whose word for ‘yesterday’ is the same as their word for ‘tomorrow’ can be said to have a firm grip on the time”. In case nobody noticed – “The times they are a-changin’ “. It is evident that there is still much work to be done.