On December 21, 2015, Axiata Investment (UK) Limited entered into a sale and purchase agreement with TeliaSonera AB, a Swedish mobile phone company, to buy 100 percent of the share capital of Reynolds Holdings Limited for approximately $1.365 billion. Reynolds owns 80 percent of the share capital of Ncell, a mobile telecommunications operator in Nepal. Reynolds is an investment company registered in the Caribbean.

As part of the agreement, Niraj Govinda Shrestha agreed to sell his 20 percent interest in Ncell to Sunivera Capital Ventures owned by Bhavana Singh Shrestha. Ncell’s 20 percent share capital has been transferred from Niraj Govinda Shrestha to Sunivera while Reynolds still owns 80 percent of the share capital of Ncell. Niraj Govinda Shrestha is domiciled in Nepal and his shares in Ncell were transferred to Sunivera; therefore, his tax liability was a non-issue. But the tax liability of TeliaSonera is debatable.

Complexity of the issue

Axiata bought the share capital of Reynolds. Technically, Ncell’s share capital has not been transferred between Axiata and TeliaSonera; however, Ncell’s ownership has effectively been transferred to Axiata via the purchase of Reynolds. Given that Reynolds is registered in a country where annual returns are not compulsory and companies enjoy privacy, obtaining details has been difficult. It is believed that TeliaSonera enjoys residence status in Norway through its investment company, TeliaSonera Norge AS. This will be important because Nepal has signed a Double Taxation Avoidance (DTA) Treaty with Norway, but no such treaty has been signed with Sweden.

The real challenge for Nepal’s tax authorities is discovering the taxable gain of TeliaSonera, a non-resident company. In the case of a domestic resident buyer, the change of ownership in the accounts of the buyer may point actual gain to the tax authorities, but Axiata is also a non-resident company. TeliaSonera’s accounts reveal the following three facts: TeliaSonera sold 60.4 percent ownership in Ncell for $1,030 million; TeliaSonera also dissolved its 20 percent local ownership for $48 million; the total gain (after tax provisions) amounts to SEK 7.5 billion (approximately $928 million).

Nepal’s tax authorities were mere spectators to this deal and did not respond to Axiata’s request to clarify their tax position. There was public displeasure after TeliaSonera hinted that no tax would be due in Nepal. The tax authorities hastily drafted a letter to both Ncell and TeliaSonera. Following the ultimatum from the Large Tax Payers’ Office (LTPO), Ncell deposited $93 million (around 10 percent of the gain) and asked for more time to pay the remaining five percent.

The sale and purchase agreement between TeliaSonera AB and Axiata includes a ‘tax covenant’. This provides Axiata, Ncell’s new owners, protection against unforeseen tax liabilities. Now, it is up to TeliaSonera to find an appropriate remedy following the demand from the LTPO. If TeliaSonera Norge AS holds a residence certificate in Norway, they may seek legal remedy there under Article 25 of the DTA Treaty.

It is important to understand that capital gains tax (gain from disposal of assets) and corporation tax (taxes on a company’s income) have different rules. The investor’s residential (domicile) status also plays an important role in deciding certain exemptions on capital gain, but there is no such exemption on corporation tax. Many countries, including the UK, provide capital gains tax exemption to foreign domiciled companies. Sweden gives capital gains tax exemption to its resident companies as well as to foreign domiciled companies.

Nepal’s existing tax laws and anti-avoidance rules lack clear guidance on the issue. According to Section 57 of the Income Tax Act, “where there is a change of 50 percent or more in underlying ownership of an entity as compared with its ownership three years previously, the entity shall be treated as disposing of any assets and liabilities owned by it.’’ The act does not clarify different types of assets and gains, leaving them open to interpretation. However, Nepal’s tax law has provisions to collect capital gains tax from non-residents if the assets are located in Nepal.

Section 35 of the Income Tax Act gives the authorities the following powers as part of the General Anti-Avoidance Rule, known as GAAR: Re-characterise an arrangement that is entered into or carried out as part of a tax avoidance scheme; disregard an arrangement that does not have a substantial economic effect; or re-characterise an arrangement, the form of which does not reflect its substance.

This section can be activated if any arrangements were made by TeliaSonera to reduce or avoid taxation liability in Nepal. It is difficult to argue that TeliaSonera has made arrangements to avoid tax in Nepal because they are simply contesting the liability. They believe that the DTA Treaty between Nepal and Norway should apply here simply because investment in Nepal was made through TeliaSonera Norge AS, a Norwegian resident company for tax purposes. It is important to remember that DTA treaties are given supremacy over domestic tax laws, leaving aside incidental cases of treaty override. Nepal’s Income Tax Act 2002 has the following international treaty provisions: Collection of tax on behalf of the treaty country (if the treaty country files a request); and any gain to be reduced or exempted according to the treaty.

Article 25 of the treaty allows individuals or companies (irrespective of the domestic laws of those states) to present their case to the resident state. Therefore, TeliaSonera may find remedies in Norway which will be binding in Nepal.

The way forward

The Inland Revenue Department must not make knee-jerk reactions to capture public sentiments. Seeking mutual cooperation from the Swedish and Norwegian revenue departments over the issue would be more appropriate than conducting a witch-hunt against Ncell and its previous CEO. They have not made it clear whether the DTA Treaty applies to TeliaSonera. It is worth investigating whether TeliaSonera has been claiming treaty relief from Norway on the income tax paid in Nepal.

Tax avoidance is a global issue which cannot be controlled by a single country. Nepal must participate in the global initiative against tax avoidance. At the same time, it must make sure that existing laws and tax treaties are applied correctly. Finally, growing public awareness of issues like tax avoidance is encouraging, but the job of interpreting the laws and treaty conditions must be left to the courts. Based on the evidence so far, the final chapter of the Ncell tax discord is yet to be written.

Ghimire is a chartered certified accountant who has taught accounting and taxation in the UK