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NFTC Expresses Concern Over Shift in India’s Approach to Taxation of Cross-Border Investment
Date: 7/20/2009
Written By: Jennifer Cummings, The Fratelli Group for NFTC, 202-822-9491

Washington, DC – The National Foreign Trade Council (NFTC) today expressed concern over arguments being made by Indian revenue authorities that the country is entitled to tax certain capital gains on global mergers and acquisitions taking place outside of the country. In a letter sent by NFTC President Bill Reinsch to Indian Minister of Finance Pranab Mukherjee, the NFTC expressed deep concern over such assertions.

"U.S.-based multinational companies in particular have a history of robust investment in India, where our investors have created significant jobs and wealth. We are writing to express our concern about a recent shift in the approach of Indian revenue authorities towards the taxation of cross-border investment that seems at odds with the efforts of the Government of India to liberalize India's foreign investment policies," wrote Reinsch.

Over the past two years, the NFTC and many of its members have noticed that Indian revenue authorities have begun to argue that India is entitled to tax certain capital gains on global mergers and acquisitions taking place outside of the country, particularly in the case of a transfer of shares in a non-Indian company between two non-Indian residents.

In addition, the NFTC letter pointed out, "it seems that the revenue authorities are trying to apply this to already completed transactions (e.g., in the Vodafone – Hutchison matter). Thus, the revenue authorities are seeking to recover the tax from non-resident buyers who, they assert, were required to withhold the tax from the consideration paid to sellers -- even if the buyers and sellers have no connection with India. The revenue authorities have sought to support this position with retrospective tax legislation enacted in 2008."

The letter also noted that Indian tax laws have not been amended in relation to these very commonplace transactions, suggesting, "the new approach is based on a novel interpretation of existing provisions." Reinsch wrote, "The new approach is novel not only in relation to long-standing Indian interpretation but also compared to generally accepted norms of international taxation. Very few countries seek to tax transfers of shares in foreign companies merely because the companies have underlying assets in country. Such measures are widely regarded as inappropriate due to their extraterritorial scope."

The NFTC also expressed concern that the new approach taken by the Indian revenue authorities to tax cross-border transactions is undermining the Government's efforts to liberalize its investment policies and could discourage future foreign investment.

"NFTC Members urge the Government of India to move swiftly to undertake a policy review of whether taxation of the transactions in question is appropriate. If, following such review, the Government of India remains convinced that these transactions should be taxable in India, our Members believe that the necessary changes should be made to the laws with prospective effect only, rather than through retrospective changes in interpretation of current law or application of withholding tax provisions," Reinsch concluded.

About the NFTC

Advancing Global Commerce for 95 Years - The National Foreign Trade Council is a leading business organization advocating an open, rules-based global trading system. Founded in 1914 by a broad-based group of American companies, the NFTC now serves hundreds of member companies through its offices in Washington and New York.