Following the coordinated attacks on Ncell by the Netra Bikram Chand led-commuinist party a few weeks ago, there is now a growing concern over the worsening business environment in Nepal. Clearly, the attack was made to warn Ncell against the evasion of capital gain tax running billions of rupees. Earlier, on 6 February, the Supreme Court had ordered Ncell and Axiata (buyer of 80 percent shareholdings in 2016) to pay capital gain taxt o the exchequer. The report published by the Economic Intelligence Unit, a sister publication of The Economist, mentioned how  the physical attacks by Chand’s party along with court verdict, have dampened the interests of the foreign investors in Nepal. The Chand-led party’s  methods of extracting taxes through violent retaliatory methods only help to strengthen Ncell’s position and undermine the interests of the state.

Ncell vs. Vodafone

When it comes to the Ncell capital gain tax debate, often, reference is being made to the Vodafoen telecome scam in India.  A similar debate had ensued in India when Vodafone bought CGP Ltd from Hutchison Telecommunications Ltd in 2007. Even the Supreme Court ruling provide a semblance of Vodafone case. As in the case of Vodafone, the Supreme Court has also ordered the buyer of Ncell (Axiata) to pay capial gains tax, albeit in the former case, it is the deduction of tax deducted at source before making payments to the seller. The court asked the buyer to pay taxes when the seller (Axiata) is no longer available inside Nepal.

The Vodafone transaction is far more complicated than Ncell in terms of size, nature of the transaction, parties involved and court rulings. In fact, the Supreme Court verdict itself runs into 274 pages. 

The Ncell deal involved Rs136.4 billion and capital gains tax, depending on one’s calculation, runs from Rs38 billion to Rs75 billion. The Vodafone deal involved INR550 billion, with capital gain tax  amounting to INR120 billion. It involved first,  the purchase of 100 percent shares of CGP Ltd (registered in Cayman Islands) by Vodafone International—a Dutch entity for a price of $11.1 billion or INR55,000 crores in February 2007 from  Hutchinson Telecommunications Ltd (registered in Hong Kong); and  CGP controlled 67 percent share ownership of Hutchison Essar Limited (HEL), a telecom company based in India. As Vodafone indirectly controls HEL through the purchase of CGP, as interpreted by the tax authorities in India, the transaction is tantamount to the purchase of HEL in India and, therefore, Vodafone is liable to pay taxes on capital gains. However, Vodafone argued that as the transaction took place in foreign lands, it is outside the jurisdiction of tax authorities in India. It never purchased HEL but only purchased CGP, and only through owning CGP, it has a controlling interest in HEL. Therefore, it is not liable to pay taxes.

At first, Vodafone challenged the decisions of the tax authorities in the Bombay High Court; the court ruled in favour of the tax authorities saying that as the source of income originates from the assets in India, it is taxable. Vodafone appealed the case in the Supreme Court. On 20 January 2012, the Supreme Court ruled in favour of Vodafone arguing that the offshore transaction is beyond the jurisdiction of tax authorities in India. Subsequently, the Government of India amended the Income Tax Act retrospectively making sure that any company in similar circumstances is not able to avoid tax by operating out of tax haven countries. In May 2012, the authorities confirmed that they were going to charge Vodafone $45million (IRs200 billion) in taxes and fines. The matter is now under the consideration (specifically in relation to the retrospective tax legislation) before arbitration tribunals, under  India-Netherlands Bilateral Investment Promotion and Protection Agreements (BIPA) in April, 2014 and India-UK BIPA in January 2017. Quite evidently, the case is still pending and can easily drag on for years. One can fairly expect similar situation with the Ncell deal.

The crux of the matter

Legal and technical complications arising out of mega deals like Vodafone and Ncell share transfers are primarily the result of globalised nature of business transactions. Goods and services originated from one country are sold in another country and have to be taxed in a different country. A simple hypothetical illustration will clarif

y the situation. Take for example, a single bottle of Scotch whisky is produced in Scotland and sold in Beijing. Imagine there are no other transaction costs involved. Here the revenue is coming from China while expense has been incurred in UK; the profit—the difference between revenue and expense—will have to be taxed. The problem we face is the application of law: Shall we apply the Chinese or the British law? Moreover, what do you do when the company happens to be registered in a different country?

As long as there are greedy companies seeking to hide their taxes via registering their businesses in tax haven countries and needy countries attracting foreign investments through tax incentives, complications like these are bound to occur. The crux of the matter lies in identifying whether the issue is that of tax evasion or tax avoidance. If the case is of tax evasion—a conscious design to evade taxes, then it is clearly a case of fraud and corruption, the companies involved can be penalised. On the other hand, if the transaction has been deliberately made, in a transparent manner, to avoid taxes (tax planning) then nothing can be done against the contriving parties. Given the complexities of global business, obviously, it is too tricky to draw a  demarcation line between the two.

Manandhar is a freelance management consultant.