Vodafone vs. India: ISDS legitimates tax avoidance
Photo by maalokki CC BY 2.0
  • Amount demanded: Data not available
  • Outcome: Non-pecuniary relief
  • Treaty invoked: India - Netherlands BIT
  • Sector: Services (telecommunications)
  • Issue: Tax

by Global Justice Now & TNI (updated by bilaterals.org)

Vodafone is now one of the largest mobile network operators in India, with more than 180 million customers – almost three times the total population of the UK.

The British telecommunications giant – one of the largest in the world – entered India in 2007 through a complex transaction resulting in its indirect purchase of a controlling interest in the Indian phone company Hutchinson Essar Ltd. Through its Dutch subsidiary, Vodafone acquired a company registered in the Cayman Islands (a renowned tax haven) which in turn held an indirect interest in Hutchinson Essar Ltd through multiple layers of companies including those registered in Mauritius (another well-known tax haven).

Because this transaction involved the purchase of assets in India, albeit indirectly, Indian tax officials said Vodafone should have to pay capital gains tax in India. Vodafone disagreed, arguing that the deal happened overseas, outside of India’s jurisdiction.

The ability of governments to tax the indirect sale of assets in their countries has become an increasingly hot topic as corporate structures have become more complex and multinationals’ strategies to minimise their tax bills, including the use of offshore transactions, have become more aggressive.

After the Indian government amended its tax code in 2012 to explicitly require that capital gains taxes be paid on the indirect sales of assets in India, with retrospective effect, it served Vodafone with a multi-billion dollar bill.

Vodafone responded with an ISDS claim, arguing that the state had breached its obligations under a bilateral investment treaty signed between India and the Netherlands in 1995.

In September 2020, the tribunal ruled in favour of the investor, deciding that India had to cease seeking the dues from Vodafone and pay US$5.5 million to the company as compensation for its legal costs.

In August 2021, India proposed to scrap the retrospective tax law and said it will refund the disputed amount, a move to help settle the case.

In December 2015, in order to limit its vulnerability to other cases like this in future, India released a text for a new “model” bilateral investment treaty – to be used in negotiations as the basis for any future trade treaties and free trade agreements – was approved including explicit language excluding tax disputes from its scope. It also includes a new clause requiring investors to exhaust local remedies and file claims in local courts before heading to ISDS tribunals.

Last update: December 2021

source: TNI