Vodafone Wins Another Indian Tax Case; This Time Over Transfer Pricing

Vodafone has emerged victorious against the Indian taxman in the latest bout of litigation between the two. The important point for the rest of us being what it tells us about those endless claims of tax avoidance and tax evasion by large companies.

It’s not just that large amounts of what the tax campaigners say should be paid in tax isn’t actually due, it’s that even large amounts claimed by the taxman aren’t actually due. We therefore need to take all of those estimates of tax due but not being paid with the appropriate shovelful of salt.

This specific case revolved around the intricacies of transfer pricing:

The Tax Department had sent Vodafone a Rs 3200 crore tax bill for allegedly undervaluing the shares Vodafone issued to its parent company. The Tax Department said that this difference in valuation was in fact a disguised loan subject to transfer pricing provisions. Vodafone argued that share premium is a capital receipt; not income and hence not taxable.

It’s not about whether Vodafone had applied the transfer rules inappropriately: it’s about whether they should be applied at all. If Vodafone has sold something, intra-group, then the price it charges the mother company, or another subsidiary, should be the same as the price that would be charged to a third party, not connected to the Vodafone group, company. Only then will income and costs be properly recorded across the various companies and jurisdictions, the correct profits calculated and thus the correct amount of tax paid in each and every different tax jurisdiction.

However, it’s not entirely obvious that a capital raising exercise is in fact akin to an intra-group sale as the court itself decided:

The order went against the two-year-old tax demand from the Income Tax Authorities, who were hoping to collect as much as Rs 3,200 crore in tax from Vodafone’s outsourcing unit in Pune. The amount included tax as well as interest for the IT demand for the year 2008-09.

In the three-minute judgment delivered today, the court said that there can be no tax without an income.

A three minute judgment does rather indicate that the court thought this was a pretty open and shut case.

This isn’t the first time, not at all, that Vodafone has faced demands for taxation that turned out, upon examination, to be unfounded. In India there was the earlier case over the purchase of the Hutchison-Essar business. Under Indian law the sale of a company in India can lead to a possible capital gains tax bill (which is quite fair enough, obviously). And Vodafone did indeed buy the business from Hutchison Whampoa . However, what it actually bought was a non-Indian company that owned the Indian business.

The Indian taxman argued that this is pretty much the same thing so therefore Hutchison should pay tax. And since they didn’t then Vodafone should pay it instead. This went all the way to the Supreme Court who said, in effect, “nonsense”. It’s not an Indian company that changed hands therefore no tax is due and that’s just what the law says. There have been attempts to change this law retroactively since: not a good sign for the rule of law in India you might think.

There was another case in my native UK. It all gets rather complex with shouts from the tax campaigners that up to £6 billion in tax was avoided and that some fishy deal was made in the end. The basics of the case were that Vodafone made a lot of money in Germany, selling things from German shops to Germans. This profit was then parked in a Luxembourg company, Germany having already had whatever tax it wanted from it. The question was, these profits, should they be taxed in the UK while they still remained in Luxembourg?

Everyone agreed that when they came to the UK (say, to pay a dividend) then they would have to pay UK corporation tax. Everyone also agreed that if those profits were being stashed in Cayman, or Bermuda, then UK tax was due under the “controlled foreign corporation” rules. The question was, did the CFC rules apply to a company within the EU? After an awful lot of fighting in various courts the answer was “no”, the CFC rules do not apply within the EU. Thus not tax was due on those profits stashed in Luxembourg.

In the end Vodafone did move some of those profits into the UK and paid £1.25 billion or so on tax on them. That difference between the original £6 billion claim and the amount paid being what the tax campaigners insist was the deal and shows that big business gets to have such special deals. Not so, of course, the law said that the £6 billion was never owed and the £1.25 billion was paid as soon as it was due.

The point here for us as a matter of public policy is that just because people claim that taxes aren’t being paid that doesn’t mean that the claims are true. Campaigners will, would you believe it, make up numbers to fit their narrative. Whether tax is due, whether it is being avoided or evaded, is a matter for the courts applying the laws as they are in each jurisdiction. And as we can see here, we’ve had three stories about Vodafone avoiding taxes (the UK one and the second Indian on have been used by one specific group I can think of in the UK for example) and in the end none of them have turned out to be correct.

We thus need to be sceptical of the claims over tax avoidance being done by these large companies. Just because someone shouts that tax is being avoided doesn’t mean that it is.