Bloomberg BNA | 12 April 2017
India pushes Cairn to settle tax with fresh interest demand
By Siri Bulusu
India’s tax authorities issued Scotland-headquartered Cairn Energy U.K. Ltd. with an amended tax notice that includes a fresh demand for interest of $1.6 billion, due on the $2.9 billion tax liability, just weeks after a tax tribunal ruled that the 10-year-old retrospective tax bill stands.
“This could be a way for the Indian government to nudge Cairn to accept the terms of its tax dispute settlement scheme instead of pursuing the international arbitration route,” Meyyappan Nagappan, senior associate at New Delhi-based legal firm Nishith Desai and Associates, told Bloomberg BNA April 10.
The April 9 interest demand is calculated from Jan. 24, 2014, the date the retrospective tax was levied, and comes amid ongoing arbitration before an international panel at The Hague.
In its latest notice, the government notice withdrew the interest liability waiver—attached to a March 9 demand for payment of the outstanding liability—stating that the U.K.-based energy giant would not be held liable for interest payment since the original tax demand was made on a retrospective basis.
Interest Liability Waiver Scheme
On March 24, the Indian government proposed an “interest liability waiver” scheme that would forgive interest payment if the principal tax demand was paid—a scheme that was coldly received by multinationals currently engaged in drawn-out tax litigation.
The settlement scheme fell especially flat when applied to the pending case with Cairn Energy, since a March 2017 order held that interest wasn’t chargeable on the retrospective $1.58 billion dollar capital gains tax demand.
Pressuring Cairn, Others, Into Settlement ?
Tax practitioners say the amended tax notice to Cairn Energy could be the Indian government’s way of pushing the energy giant to reevaluate its latest settlement offer.
“The Indian government is not just pushing Cairn with this fresh interest tax demand, it’s a way to indirectly nudge all companies tied up in arbitration to opt into the settlement scheme,” Nagappan said, adding that if Cairn Energy “crumbles” under pressure, it could set a precedent for other companies to follow.
The latest settlement scheme comes seven weeks after the government’s previous resolution scheme—waiving interest and penalty if the principal amount is paid and challenges to constitutional validity of retrospective tax amendment withdrawn—expired without any major cases opting in for the offer.
The Indian government’s tax dispute with Cairn Energy UK Ltd. began in 2014 when the Indian government took the view that transfer of shares of Jersey-based Cairn India Holdings Ltd.—from U.K.-based Cairn UK Holdings Ltd. to India-based Cairn India Ltd. (CIL)—was taxable in the amount of 290 billion rupees ($4.41 billion), since the restructuring resulted the indirect transfer of underlying Indian assets.
Cairn UK Holdings Ltd. entered into international arbitration with India following the tax demand, on the grounds that the retrospective amendment abused the U.K.-India bilateral investment treaty terms, and maintains that the tax should be withdrawn since the transaction was not taxable when it took place in 2006.
The retrospective 2012 amendment to India’s Income Tax Act originated after India’s Supreme Court ruled that a 2007 offshore restructuring of assets between Vodafone Group and India-based telecommunications company Hutchinson Essar Ltd. was not taxable. The Indian government amended its tax law to include offshore transfer of Indian shares under India’s tax jurisdiction, and slapped Vodafone Group with a $2 billion due to the provision’s retrospective applicability.
High Demand Appeals
As of March 31, India’s Central Board of Direct Taxation was demanding 6.7 trillion rupees ($104 billion) across 93,696 “high demand appeals,” or cases involving tax demands over $15,509.
According to a 2014 Tax Administration Reform Commission report on India’s tax administrative reform, cases pending for over a decade before the three appellate authorities—the Income Tax Appellate Tribunal, High Court and Supreme Court—numbered 1,446 in financial year 2012-13.
Outlook for resolution is grim for companies already involved in the litigation process, say tax practitioners, because the Indian government has limited resources with which to handle the pending volume. Dispute resolution schemes are one of the ways the government has tried to reduce that burden.
“In some cases it is advantageous for a company to opt into such a scheme because it bring finality and immunity from future proceedings,” Riaz Thingna, director at Grant Thornton Advisory Pvt. Ltd., told Bloomberg BNA April 11.
Thingna said in some cases, tax officers can levy 100 to 300 percent penalties based on how “malicious” they characterize the transaction, or taxpayers will enter into litigation and only later realize the weakness of their case. In such scenarios, a quick “out” from prolonged litigation is an attractive option.
“Reducing uncertainty is a worthwhile proposition for companies operating in India,” Thingna said.
Costly, Lengthy Disputes
Tax practitioners agree that companies are not concerned about tax costs “however high they may be” so long as there is certainty. When retrospective applications of tax laws and inadequate legal resources come into play, however, India appears to be a less business-friendly destination.
“The Indian government does not have the mechanisms to prevent tax disputes, but it has a lengthy process to resolve them which can be costly for companies,” Sanjay Kumar, tax partner at Deloitte India, told Bloomberg BNA April 6.
The initial process of beginning tax disputes takes up to five years after the assessment year, a substantial lag that creates uncertainty and risk for companies looking to do business in India.
“I hope the government would get more serious about the resolution of disputes, which begins with preventing it in the first place,” Kumar said.
Cairn Energy did not respond to Bloomberg BNA’s April 10 emailed request for comment.