All you wanted to know about the Vodafone tax case

B L : Meerasiva:17 Feb 14 

Vodafone Plc is learning that when it comes to dogged persistence, its popular pug is not a patch on the Indian taxman. Last week, the government announced that it was giving up its ‘conciliation talks’ with the global giant and was going ahead with its earlier tax demand relating to the Hutch-Vodafone deal of 2007.

Hey, you’re saying, why is Vodafone again in the dock for avoiding tax? 

Didn’t the Supreme Court let it off the hook?

 Well, it’s a long story.

What is it?

Long long ago in 2007 Vodafone International Holdings BV decided to expand its footprint in the Indian mobile phone market by buying out Hutchison Essar.

But it decided to take the roundabout route; its subsidiary exchanged cash for shares with a similar holding company for Hutchison Essar, in far off Cayman Islands. Having sewn up the deal entirely offshore, where the Indian tax authorities had no say, Vodafone then proceeded to make Zoozoo advertisements .

The deal started a ‘wherever you go, we will follow’ saga of the IT department chasing the company. The Supreme Court ruled in 2012 that Vodafone’s actions were “within the four corners of law” .

It also advised Indian taxmen to “look at” the transaction instead of “looking through” it to attribute motives to the deal. What the Indian government saw however was over ₹20,000 crore in unpaid taxes, interest and penalty slipping out of its hands.

It decided to strike fear into the heart of companies by coming up with the General Anti-Avoidance Rule (GAAR). This rule basically said that the government could dig up past deals, all the way back to 1962. .

There was a huge hue and cry and GAAR was postponed to 2016. Still, the revenue officials persisted with their pet case as they felt they could net some good money in this and other high value acquisitions.

Why is it important?

Cases such as Vodafone have stirred up a global debate on the devious tax planning strategies and what governments can do to stymie them. After all, it is taxes that pad up the exchequer.

Standard methods employed by global companies are reducing the locally declared profits and shifting their profits to lower-tax locations. Governments around the world woke up to this trend , referred to as base erosion and profit shifting (BEPS).

Also, domestic firms who walk the straight and narrow path may be put at a disadvantage, as cross-border operators exploit the loopholes. There is also the moral hazard. If global biggies get away with paying no tax by employing clever accountants, wouldn’t domestic corporations be tempted to do the same?

Why should I care?

Knowing whether a company is paying its dues is important for investors because for one, it is proof that the reported profits do indeed exist.

Two, tax avoidance even within the confines of law can have big repercussions. It could knock out a company’s profits and reputation.

Finally, if you’re a law abiding citizen who pays all the dues and saves the receipts, you may be particular about checking if the company you are investing in is equally above board.

In your own dealings, if you come across grey areas in the tax rules, a penny saved in tax may lead to a pound in penalty to be paid later. Take a look at Vodafone, where demands for penalty and interest add up to two times the original tax bill.

Bottomline

Wherever you go, the taxman will follow. So when it comes to paying taxes, be faithful to the rules.

(This article was published on February 17, 2014)