Once the news of TeliaSonera selling its stake in NCell floated in media, concerns have been raised on taxability of the proposed transactions as per Nepalese Tax Law. TeliaSonera in its official press release stated that “TeliaSonera has agreed to sell its 60.4 percent ownership in the Nepalese operator Ncell to Axiata, one of Asia’s largest telecommunication groups, for USD 1,030 million on a cash and debt free basis. At the same time, TeliaSonera will dissolve its economic interests in the 20 percent local ownership and receives approximately USD 48 million”.
This is one of the biggest deals in Nepalese corporate history, and analysts predict that a deal of such quantum is not expected at least in the next 10 years. With such a huge value in stake, it is obvious that questions are being raised on whether the deal being structured outside Nepal is an attempt to avoid tax on Nepal and if Nepalese tax authority can use existing provisions to bring the transaction into Nepalese tax bracket. Bizmandu, in its article details out the structure of holding of TeliaSonera, but gives an impression that this is “Tax Evasion” and the Nepalese tax authority can impose tax on the transaction, the way Vodafone case was dealt with in India.
This article analyzes the taxability of proposed transaction in Nepal, the similarity and differences with Rs. 20,000 crores Vodafone case of India and current loopholes in the Nepal tax law that should be addressed.
What we know so far about #NCelldeal?
Axiata is making 100% acquisition of Reynolds Holdings Ltd., thus effectively securing an 80% equity interest and controlling stake in Ncell. Reynolds Holdings Ltd. is a company registered in a tax haven in the Caribbean and owned by TeliaSonera Asia Holding. The shares of Reynolds would be acquired by Axiata’s group company based in UK. (Source: Bizmandu)
The facts from tax perspective
Reynolds Holdings Ltd. is a non-resident company for Nepal. Even after the deal, the substantial holding of NCell would continue to remain with Reynolds Holding and so legally there would be no change in shareholding of NCell in Nepal. This is regarded as an indirect transfer of underlying ownership.
The gain from sale of shares is at the hands of TeliaSonera Asia Holding, a company that is non-resident in Nepal. A non-resident company is subject to Nepalese Income Tax liability only if it has any income that is sourced in Nepal (Sec. 5 & Sec. 6). Principally gain from sales of assets in Nepal and prescribed payments received from business, employment or investment activities is Nepal sourced payment (Sec. 67). It is a well established principle that the situs of shares are located in the country where the company is incorporated or has its registered office, but in what appears to be a drafting error, the definition of “assets in Nepal” excludes shares in Nepalese companies and there appears to be a grey area in the law that can be explored to avoid Nepal’s tax liability even in case of directs transfer. When it comes to indirect transfer of shares, it’s clearly a “Foreign Sourced Income” for Nepalese taxation purpose, resulting in no taxability to TeliaSonera, which is a non-resident company. The withholding tax (TDS) provisions as per Sec. 95Ka will not apply because the transaction is between two non-resident companies. Similarly, the Change in Control (Sec. 57) would not result in making the gain of TeliaSonera taxable in Nepal because the entity (NCell) to which Sec. 57 applies and its shareholders are two different person in the eyes of law and also for tax purpose (Sec. 52(1))
Is the NCell deal similar to Vodafone case of India?
Few of the features of the transactions are similar in both NCell deal and Vodafone deal:
The transfer of shares was of non-resident companies based outside India, similar to non-resident companies share transfer involved in case of NCell.
The transactions resulted in indirect transfer of ownership of shares, similar in both the deal.
The Indian law did not regard indirect transfer of shares of Indian source, similar to current Nepalese tax law.
Vodafone Ruling
The interest in Hutch Essar Limited registered in India was indirectly held by HTI Holdings Ltd. based in British Virgin Island through intermediary companies located in Cayman Island (CGP) and Mauritius. In 2007, the shares of CGP were sold to Vodafone NL, resulting into Vodafone indirectly acquiring controlling interest.
The Indian tax authority held that it had jurisdiction to tax the transaction by regarding Vodafone NL as “taxpayer in default”, a decision uphold by High Court. However, in January 2012 the Supreme Court ruled in favor of Vodafone enumerating several principles in the process. While explaining the source concept it said that the charge of capital gains requires the existence of all three of the following elements:
transfer;
existence of a capital asset; and
situation of such asset in India.
Explaining why indirect transfer cannot be read into above provision, the court clarified that a legal fiction has limited scope and cannot be expanded by giving it a purposive interpretation particularly when it would transform the concept of charge-ability under the tax law.
The Current development in Vodafone case
The Vodafone case was settled with the Supreme Court verdict, but the UPA government came up with the retrospective amendment in Income Tax Act 1961 to undo the Supreme Court ruling and claim tax from Vodafone. The retrospective amendment was controversial and invited criticism from business community, as it increased tax uncertainty in operating in India. Even the Modi Government could not annul the retrospective amendment made by UPA government, and currently the government is in process of out of court settlement of the case.
Is the proposed transaction tax evasion?
In the case of Azadi Bachao Aandolan, the Supreme Court of India, the court upheld the right of a taxpayer to arrange its affairs in any legitimate manner within the framework of law to mitigate tax, unless there is deliberate attempt to evade taxes. The Supreme Court of India in Vodafone case discussed if the structure used by Vodafone can be considered as tax evasion, taking into consideration the Westminster case and Ramsay Principle and concluded in favor of Vodafone. Now, it is well established principle that tax planning is legitimate, if it is within the framework of the tax law. A tax payer can arrange his affairs so as to reduce the tax liability, provided that the arrangements do not use dubious methods that results in defeating the law itself. This would mean that the tax department should look at true legal nature of the transaction, using “look at” provisions. .
The investment of TeliaSonera in different region and countries seems to be structured through several holding companies. (Refer Annual Report 2014 of TeliaSonera) This is the normal way of operation of multinational companies. Further, MNCs use tax haven to route their investment, or make investment through the double tax treaty network countries so as to simplify tax complexities or reduce tax burden. So, the use of holding companies or tax haven does not in itself render the transaction as tax evasion. In Vodafone case too, the Supreme Court preferred to ignore the fact that the holding company was registered in Cayman Island, a tax haven.
However, if the use of business structures lacks commercial substance the tax authority can challenge the structure as abusive and as tax evasion scheme. This is normally done through use of General Anti Avoidance Rules or “Look At” provisions.
What can IRD do in NCell case?
It is clear from the discussion above that the provisions in the current tax law are insufficient to bring the TeliaSonera offshore transaction in to Nepal’s tax bracket. Within the current tax frame, IRD can look into the legal substance of the investment structure to ascertain if an abusive structure has been used. But it is unlikely that that the holding structure used by TeliaSonera can be termed as dubious for tax evasion purpose.
An immediate amendment in our tax law to bring indirect transfer of shares by non-resident companies (resulting in change in underlying ownership in Nepal) within the ambit of tax law may be one of the options that IRD can consider. The current Income Tax Act 2058, is already short of provisions that capture modern way of doing business and needs improvement in several aspects.
The existing CFC provision applicable for resident companies in Nepal takes into accounts both direct and indirect interest of Nepalese companies outside Nepal. But for investment made by non-resident companies, clarity is missing even for direct transfer of shares. Referring to the Vodafone case of India, where the government even found it essential to make retrospective amendment in the tax law, IRD too should bring changes to clarify the definition of “Assets located in Nepal” covering both direct and underlying ownership through intermediaries. That would ensure that transactions such as of TeliaSonera where the seller has substantial capital gain from the increased value of business in Nepal are not out of Nepalese tax ambit just because of the legal structures used for tax planning purpose.
Source: devmukunda.com
प्रतिक्रिया दिनुहोस्