Hutchison Telecom and Vodafone Offshore Share Transfer Tax Planning

In 1992, Li Ka-shing, through Hutchison Telecommunications International (“HTIL”), a subsidiary of Cheung Kong Holdings, partnered with India’s Max Group to enter the Indian telecom market. Over time, the company grew and restructured, with Li Ka-shing ultimately holding a 67% controlling stake. In 2005, the company was renamed Hutchison Essar Limited (“HEL”), becoming one of India’s largest telecom operators.

In May 2007, Li Ka-shing sold HEL to the UK’s Vodafone for $11.1 billion in cash. Shortly after the transaction was completed, the Indian tax authorities targeted the deal, demanding that Vodafone, as the buyer, pay $2.2 billion in capital gains tax on behalf of Hutchison. This marked the beginning of a 14-year legal saga that embroiled Vodafone in one of the most contentious tax disputes in Indian history. This case serves as a classic example of offshore share transfer tax planning. Below are the key milestones of the case:

I. Key Milestones in the Vodafone Case

• 2007: Li Ka-shing pocketed the entire $11.1 billion from the transaction without paying any Indian capital gains tax.
• 2009: The Indian tax authorities demanded that Vodafone, not Hutchison, withhold and remit $1.7 billion in capital gains tax during the transaction. Vodafone challenged this and filed an appeal.
• 2010: The Bombay High Court ruled in favor of the tax authorities. Vodafone appealed the decision.
• 2012: The Indian Supreme Court ruled in favor of Vodafone, dismissing the tax authorities’ claims. In response, the Indian government amended its tax laws to explicitly include offshore share transfers and made the changes retroactive to 1962 (over 50 years prior).
• 2013: Under the new 1962 tax law, the Indian tax authorities resumed their pursuit of Vodafone.
• 2014: Vodafone, dissatisfied with the Indian courts, initiated international arbitration in The Hague under a bilateral investment treaty (“BIT”).
• 2016: Despite the pending arbitration, the Indian tax authorities continued to increase the tax liability, piling on penalties and interest.
• September 2020: The Permanent Court of Arbitration in The Hague ruled in favor of Vodafone.
• December 2020: India appealed the arbitration ruling in a Singapore court.
• October 2021: The Indian government, under Section 119 of the Finance Act, announced the withdrawal of the 2012 retroactive tax amendment. It promised to resolve the tax disputes provided taxpayers withdrew all litigation and waived interest and costs claims.
• December 2021: Vodafone confirmed it had applied for a settlement with the Indian government.

This tax dispute was the largest in Indian history in terms of the amount involved, the scale of controversy, and the length of the dispute.