DIRECT TAXES
| Vodafone lesson: China takes taxation notes from India Mon, 21 Dec 2009 21:55:54 GMT |
| The Economic Times Vodafone lesson: China takes taxation notes from India 22 Dec 2009, 0325 hrs IST, M Padmakshan, ET Bureau MUMBAI: The Indian tax authorities’ decision to bring under the tax net the $11-billion acquisition of Indian telecom major Hutchison-Essar (now Vodafone-Essar) has kicked off a similar thought process among the tax regimes of other nations. China, a couple of days ago, introduced Circular 698 that empowers its tax administration to tax capital gains if its resident enterprises are sold through a transaction taking place outside China between two non-resident parties. This is similar to the approach of the Indian tax regime in the Vodafone case. In the case of Vodafone, the transaction was between Vodafone, the buyer and the Hong Kong based Hutchison International, the seller. In this case, Hutchison sold its shares in the Indian company through a Mauritius based holding company. Still, the Indian tax authorities held the view that it was immaterial whether the shares transaction took place outside India or not. What mattered was for the purpose of taxation was whether capital gains came out of India. If that was the case, tax was required to be paid in India if the overseas sale of shares results into a change of ownership of the Indian company. The Chinese authorities appear to be following the same line in its circular 698. This requires the enterprise in China to furnish full details of the offshore intermediate company through which the transfer of shares took place. Sandeep Ladda, Associate Director, PricewaterhouseCoopers said, “This could significantly impact foreign investments flowing into China. This is because Chinese tax authorities would now have significant powers to enquire about tax coming into the country for transactions taking place outside it. Foreign investors would also be faced with significant compliance requirements. The introduction of these rules by China could also give impetus for other jurisdictions to follow suit in introducing similar taxing rules, which go beyond the territorial jurisdiction of a nation, thus breaching the comity of nations.” Circular 698, according to M Lakshminarayanan, Head of Tax, Deloitte India, is retrospective from January 1, 2008 and will have a significant impact on many companies that use the offshore holding model to invest in China. “The highlights of the circular include levy of capital gains tax on the sale of a Chinese resident enterprise by a non-resident and in certain cases on the sale of an offshore holding company owning this enterprise. This would call upon the buyer to withhold tax and in the event of a default, penal consequences would apply. The circular also authorises the Chinese tax authority to disregard an offshore intermediary company, by using the substance over form principle,” he added |
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