#NoTaxNoNcell. This hashtag resonated strongly in 2015 when the profits earned in the single largest share purchase transaction in Nepal’s corporate history were not subjected to taxes. It pressed hard for more scrutiny and audits by the parliamentary committees and the auditor general, and included demands for recovery of taxes through public interest suits filed before the Supreme Court. The deal to secure the purchase of Ncell, one of the duopoly telecom service providers incorporated in Nepal, was structured through the acquisition of 100 percent share capital of Ncell’s immediate holding company Reynolds Holdings Ltd, incorporated in St Kitts and Nevis, a country infamously known for the low taxation offered to businesses. Malaysian company Axiata Group Berhad, through its United Kingdom subsidiary Axita UK, purchased Reynolds from Telia’s subsidiary established in Norway. The purchase price paid after the completion of the transaction on April 11, 2016 as per Axiata’s public disclosure was $1.365 billion.

Nothing certain but taxes

The consummation of the transaction triggered multiple assessments by the Large Tax Payers’ Office for recovery of taxes owed to Nepal. In the month of April 2016, Ncell was assessed for 15 percent of withholding or advance tax while the selling entity, Telia, on the other hand was assessed for the remaining 10 percent for the gains realised in the sale. As regards tax assessed to Ncell, approximately Rs9 billion paid in the first instance was later revised to an additional amount of approximately Rs13 billion. An additional tax of approximately Rs13 billion was based on the difference in the purchase price paid by Axiata and the previous cost incurred by Telia during the indirect acquisition of Ncell from Portofino Associates in 2008. Telia continued to ignore the assessments and did not file taxes for the demands made to it.

Due to the evident shortfall in the recovery of taxes, several public interest actions were taken up by the Supreme Court. On April 9, 2019, three years after the petitions were filed, the Supreme Court rendered its judgement after interpreting in detail the provisions of the Income Tax Act 2002, affirming the liability of Ncell to pay further taxes to the government of Nepal. Subsequently, the Large Taxpayers' Office immediately assessed Rs39 billion, which upon challenge by Ncell before the Supreme Court on April 22, 2019, was revised downward to Rs22.4 billion in a ruling delivered on November 21, 2019.

Simultaneously with the writ petition, Axiata UK and Ncell jointly submitted a request for arbitration on April 24, 2019 to the International Centre for Settlement of Investment Disputes (ICSID) claiming, amongst others, violations of the United Kingdom-Nepal Bilateral Investment Treaty 1993. Nepal elected not to appoint its arbitrator and further refused to acknowledge the jurisdiction of the ICSID until October 2020, during the period in which Axiata (and Ncell) were able to obtain provisional relief restraining Nepal from altering the status quo or aggravating the tax dispute. The provisional order issued by the ICSID tribunal was not obliged by Nepal, and thus an additional amount of Rs23.5 billion in taxes was retrieved from Ncell.

Also, during the pendency of the ICSID arbitration, the Large Taxpayers' Office notified payment of tax of Rs57 billion under Section 57 of the Income Tax Act in January 2021 owing to the change in control of Ncell, the demand of tax was, however, stayed by the Supreme Court.

Claims and defences

The dispute between Axiata (and Ncell) and Nepal revolves around purported breaches by Nepal of the UK-Nepal Bilateral Investment Treaty when imposing and collecting Rs420 million in taxes from Ncell. The main relief sought jointly by Axiata and Ncell include restitution of taxes already paid to the government of Nepal and injunctions not to demand further taxes with respect to the share purchase deal between Axiata and Telia. Although the award delivered by the ICSID tribunal on June 9, 2023 has not been disclosed publicly, several of the claims of Axiata (and Ncell) and the rationale behind the ICSID tribunal’s rejection of the claims are being summarised based on the information available in credible media reports.

Typically, the host country defending the claims of foreign investors in an ICSID tribunal raises jurisdictional defences. However, the ICSID tribunal by rendering its decision on merits has seemingly dismissed jurisdictional objections raised by Nepal. By examining whether disputes on tax matters with the government of Nepal was specifically foreseeable, the ICSID tribunal appears to have concluded that Axiata Malaysia which structured the investment in Ncell through a UK subsidiary in 2015 to take advantage of the UK-Nepal Bilateral Investment Treaty had not sufficiently foreseen that a specific dispute on application of capital gains tax would arise with Nepal in the future.

The alleged claim by Axiata (and Ncell) regarding violation by Nepal of fair and equitable treatment stands primarily on three limbs: (a) Violation of legitimate expectation due to assurances by the prime minister and government officials not to demand capital gains tax for offshore transaction; (b) Denial of justice due to gross misinterpretation and misapplication of the Income Tax Act by the Supreme Court; and (c) Arbitrary and unfair treatment of Ncell’s business operations. The ICSID tribunal did not find merits in any of these assertions and decided in favour of Nepal.

The first limb, government assurances and legitimate expectations, must have failed for several reasons. Under ICSID jurisprudence, claimants are required to establish that the assurances are legitimate, definitive, precise and unambiguous. Hence due to absence of binding representation by Nepal, Ncell’s reliance on mere informal oral assurances and laxity in formally obtaining advance tax ruling on the taxability of the share purchase transaction compounded its failed claims.

The second limb, denial of justice, was even weaker. Denial of justice claims are governed by customary international law and require fulfilment of strict principles and a very high evidentiary threshold. A mere erroneous decision by a national court is insufficient. Systematic injustice and flagrant and malicious misapplication of the law must be demonstrated with clear evidence. Neither the exercise of extraordinary jurisdiction by the Supreme Court to entertain public interest suits under Article 133 of the Constitution of Nepal nor the interpretation of Section 57 of the Income Tax Act to treat indirect disposal as taxable to levy tax on Ncell has been considered by the ICSID tribunal as egregious misapplication of Nepali law to hold Nepal accountable for breach of international law.

The third limb of the claim is arbitrary, discriminatory and non-transparent conduct by the agencies of the government of Nepal, including the Department of Industries and Nepal Telecommunications Authority. This contention mainly relies on the favourable treatment accorded to Nepal Telecom over Ncell, governmental delays and attacks on Ncell’s physical infrastructure, causing significant disruption and impairment to Ncell’s operations and investments. Similar to the denial of justice claims, “arbitrariness” and “discrimination” also need to withstand a severe threshold of scrutiny. Placing reliance on past investment treaty decisions, the ICSID tribunal appears to have concluded that delays on the part of Nepal government agencies were not serious shortcomings to establish wilful disregard of due process of law or manifest impropriety.

Although prevailing in its first investment treaty arbitration creates a positive outlook for Nepal, leaving open to interpretation the nature and total number of times direct/indirect share disposals can be taxed does not. Measures to control tax avoidance malpractices and a taxation regime that does not deter investors are dual requisites for a conducive investment climate. And if this is the intended purpose, the Income Tax Act begs reform to unambiguously identify “legitimate tax planning” and “abusive tax planning”.