Taxing Telia Sonera & Axiata Deal - Ncell
Ncell is a leading Telecom operator in Nepal providing mobile telephony services throughout Nepal. GSMservices in Nepal, initially underMero Mobilebrand, re-branded to Ncell on 12 March 2010. Ncell is the largestISPin Nepal with a subscriber base of more than 1.9 million users.Ncell had 10 million mobile subscribers in early 2013.
On December 21, 2015, as a part of their ambition to reduce their presence in seven Eurasian markets and focusing on their operations in the Nordics and Baltics Telia Sonera announced its divestment of 60.4 percent Stake in Ncell to Malaysian Telecom Operator Axiata for USD 1.03 billion.
The Deal in Detail
The Star Online a Malaysian News Channel reports that as a part of the Deal, Axiata had signed a conditional sale and purchase agreement with TeliaSonera UTA Holdings B.V. and SEA Telecom Investments B.V. for the 100% acquisition of Reynolds Holdings Ltd a Company registered in West Indies. And as a part of the deal, 20% Stake of Mr. Niraj Govinda Shrestha local shareholder will be purchased by a Singapore registered Company Sunivera Capital Ventures owned by Bhawana Singh Shrestha as a new local partner. It further reports that the purchase price of 100 percent stake of Reynolds Holdings ltd is USD 1.365 billion with which Axiata will own 80 percent equity interest and controlling stake in Ncell.
Tax Controversy so far
Soon after the Press Release by Telia Sonera about their Divestment of Stake in Ncell, There has been whole lot of debates going as to whether Nepal Government will/has to bring the deal within its Tax Net or not. Some People have opinioned that the Capital Gain Tax can be levied to Telia Sonera on its gain and some has opinioned that IRD cannot levy the Capital Gain Tax because the deal has happened outside the jurisdiction of Inland Revenue Department of Nepal. The controversy has reached at such level even the Public Account Committee of Parliament had invited various stakeholders to discuss about Ncell's share transfer and the issue of revenue. Nepal Republic Media reports that Ncell had asked for an advance ruling from the department on December 22, asking how much revenue it needs to pay to IRD. Basically, the department should reply to Ncell within 45 days. However, as per the information available the department is still undecided on the issue even though such period have already elapsed.
What Nepal Income Tax Law says
As per Section 5 of Income Tax Act 2058 of Nepal, Tax is charged in four heads namely Income from Employment, Income from Business, Income from Investment and Income from Wind-fall gain. Further Charging Section of Income Tax Act, Section 6 says, Incomes earned by any person for any business, employment or investment in any income year shall be considered assessable income: (a) Income earned by any Resident person from his employment, business or investment in that income year irrespective of the place of his source of income, and (b) Income earned in that income year by any non-resident person from employment, business or investment having income source in Nepal.
Further Section 67 of Income Tax Act defines the Source of Income in case of International tax. Which says, Net Gain income is deemed to be source in Nepal if disposed assets or liability is in Nepal. In case of Investment in Securities, Net Gain is source based on residency of Owner. Further Income Tax Act explains that "Property situated in Nepal" means the land or buildings situated in Nepal and the property other than land or building of a resident person situated in any foreign country or if the person is associated with a controlled foreign entity pursuant to Section 69, inclusive his interest in that entity. "Liability to be borne in Nepal" means the liability of a resident person.
So from the above Income Tax Provisions, Prima Facie it appears that the Sale of Shares of Reynolds Holdings ltd by Telia Sonera UTA Holdings B.V. and SEA Telecom Investments B.V. does not come under purview of Income Tax Act of Nepal as the Shares of Reynolds Holdings ltd cannot be taken as having Source in Nepal. Further the Stake of Reynolds Holdings Ltd will not be changed in the Books of Ncell even after the Deal. Moreover if we look at the law carefully, it reads that Direct Sale of Shares in Nepalese Company by any Nonresident even does not come under the purview of Nepalese Income Tax and Capital Gain from the Direct Transfer of Shares in Nepalese Company by any Non Resident cannot be taxed in Nepal.
Section 95KA, reads that Sale of Shares of Resident Entity will be subject to withholding Tax at prescribed rate. Hence this Transaction between Telia Sonera & Axiata does not come under the purview of Section 95KA because the Renaulds Holding Ltd is not a Resident Entity in Nepal as per the Income Tax Act of Nepal.
But Sale of 20% Stake of Mr. Niraj Govinda Shrestha local shareholder to Singapore registered Company Sunivera Capital Ventures owned by Bhawana Singh Shrestha is Taxable in Nepal provided 20% Stake of Mr. Niraj Govinda Shrestha is not hold through the Company registered other than in Nepal.
What is much talked about Sec 57?
As per Section 57 of Income Tax Act If the ownership of any entity changes by Fifty percent or more as compared to its ownership until before the last three years, the entity shall be deemed to have disposed the property under its ownership or the liability borne by it. And by virtue of Section 41 of Income Tax Act, Tax Shall be levied on the difference between Market Value of Assets minus Net Outgoing made for the property and Market Value of Liabilities minus net incoming derived for that Liability. Moreover this provision is applicable to the Entity whose shares are so transferred but not to the Person/Entity who sales the shares.
Now let us talk about General Anti Avoidance Rule (GAAR)
As per Section 35 of Income Tax Act 2058, for purposes of ascertaining the tax liability the Department may re-characterize any arrangement or any part of such arrangement made or attempted to be made as a part of a tax avoidance scheme, disregard any arrangement or any part of such arrangement that does not show any substantial effect, or re-characterize any arrangement or any part of such arrangement that does not show any substantial element. Further it explains that "tax avoidance scheme' means any arrangement with a main objective to have avoidance of tax liability or to lessen the tax liability. Income Tax Manual clarifies that for the purpose of using GAAR, Department should differentiate between whether the arrangement is the part of widely usedmodern business transaction or not. Similarly whether the arrangement is part of tax planning to get the benefits provided by the Tax Law of State or not.
From this Provision, The Income Tax Department may tax Telea Sonera terming the Investment made through West Indies is an arrangement/structure made to avoid the Tax. But if we look at the Global Business Trend, it is a common practice among Multinational Companies (MNCs) to make Investments through their Company registered in Tax Heavens like Caribbean Islands, Mauritius, Dubai or the countries where Double Taxation Avoidance Agreements are entered into are established practices to get the Tax Benefits provided by such Countries. Telia Sonera has such investment in many countries including West Indies through which it has been making Investments throughout the Globe. And hence only because investments are made through these countries i.e. tax heavens cannot be termed as an attempt to tax evasion.
What verdict Supreme Court of India gave in similar Case of Vodafone?
Similar kind of case has happened in India, Where a foreign company incorporated in Netherlands, Vodafone International Holdings BV (VIH) entered into a Share Purchase Agreement with another foreign company incorporated in Cayman Islands, Hutchison Telecommunications International (HTIL) to buy the shares of a third company incorporated in Cayman Islands, CGP Investments (Holdings) (CGP) for about $ 11 billion. CGP ultimately held shares in an Indian company called Vodafone Essar (VEL) which was an operating company engaged in the business of mobile telephony in India. In case of Vodafone, Supreme Court of India has ruled out the attempt/possibility to tax Transactions happened between the companies registered outside India. In its decision by Supreme Court of India. it has cited the Famous English Case of Commissioner of Inland Revenue vs His Grace the Duke of Westminsterand WT Ramsay vs Inland Revenue Commissionerwhich have laid principles on the concept of tax avoidance / tax evasion. The Westminster principle states that given that a document or transaction is genuine, the court cannot go behind it to some supposed underlying substance. The said principle has been reiterated in subsequent English courts judgements as the cardinal principle.
With respect to the Holding Structure, Supreme Court of India further stated that in transnational investments, the use of a tax neutral and investor friendly countries to establish SPV is motivated by the need to create a tax efficient structure to eliminate double taxation wherever possible and also plan their activities attracting no or lesser tax so as to give maximum benefit to the investors and that it is a common practice in international law, which is the basis of international taxation, for foreign investors to invest in Indian companies through an interposed foreign holding or operating company such as Cayman Islands or Mauritius based company for both tax and business purposes. In doing so, foreign investors are able to avoid the lengthy approval and registration processes required for a direct transfer (i.e. without a foreign holding or operating company) of an equity interest in a foreign invested Indian company. The Indian Apex Court further recognized the holding company structure which has been accepted not only internationally but also under the Indian Companies Act as well as the ITA. The approach of both the corporate and tax laws, particularly in the matter of corporate taxation, generally is founded on the separate entity principle i.e. to treat a company as a separate person for tax purposes. Further, under the tax treaty, a subsidiary and its parent are also totally separate and distinct tax payers.
With this Supreme Court of India held that the transaction of sale of one share of CGP by HTIL to VIL was not subject to tax in India by the Indian tax authorities.
Structure of Telia Sonera, Can this be termed as the Structure to avoid Tax
Telia Sonera AB is a company registered in Swiden, which has been investing in Telecom Business in Europe and Asia Region through its various subsidiaries registered in various countries of Europe, Asia and Caribbean. It has more than 21 Subsidiaries including the Subsidiary of various Subsidiaries, which are investing in Countries like Nepal, Afghanistan, Tajikistan, Uzbekistan, Kazakhstan, Moldova etc. If we look at the Structure used by it for the Investment in Ncell, The Parent Campany Telia Sonera AB has invested in Telia Sonera AB Finland, Finesse Company has further invested in Sonera Holding B.V. Netherlands, The Dutch Company in turn has invested in more than 5 Subsidiaries including Telia Sonera UTA Holding B.V. Netherlands, Telia Sonera UTA Holding B.V. has further invested in more than 5 Subsidiaries including Telia Sonera Asian Holding B.V. Netherlands, Telia Sonera Asian Holding B.V. has 100 percent stake in Telia Sonera Norway Nepal Holding, Norway and Telia Sonera Norway Nepal Holding has two subsidiaries namely Reynolds Holding Ltd, West Indies and Airbell Services Ltd, Cyprus. And Finally Reynolds Holding Ltd has 80 percent Stake in Ncell. From the Structure, it is evident that Telia Sonera has not been using this structure to make investment only in Nepal. The intermediary companies have been used not only to make investment in NCell Nepal but also to invest in various other countries. Hence it may not be wise to say that Telia Sonera AB, has used this complex holding subsidiary structure only to make investment in Nepal or to avoid the Tax in Nepal.
For the reasons discussed above, It appears that Section 5 of Income Tax Act may not be able to bring the Telia Sonera & Axiata deal under the Tax Net. And Section 57 is not relevant as the Shareholding of the Ncell will not change from this deal. Now the only option that IRD have is to levy tax to Telia Sonera using Section 35 i.e. GAAR. However, taxing this deal with the help of GAAR terming Holding-Subsidiary Structure and Investment made by Telia Sonera from Renaults Holding Ltd is a structure created to avoid tax may be contrary to the established global business practices at the International Level. And certainly it may not be in line with the precedence set by the Apex Courts of various countries including India. Hence, while taking any decisions as to whether tax should be levied or not in this Deal, IRD is advised to consider the Judgments being passed by various courts in similar kind of cases, prevailing tax laws of Nepal and the future consequences of taxing such transactions with respect to the Foreign Investments in Nepal.
By. CA. Nil Saru, FCA, ISA
Mr. Saru is the Managing Partner of NBSM