Tactical tax retreat: Cairn Energy, Indian govt come out smelling roses

S MurlidharanUpdated: Wednesday, September 08, 2021, 11:08 AM IST
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Judge Richard J Leon of the US District Court for the District of Colombia has given Cairn time till September 10 to file a response to the government's 'Motion to Dismiss' petition. |

On September 7, UK-based Cairn Energy PLC said it will drop litigations to seize Indian properties in countries ranging from France to the US, within a couple of days of getting a $1 billion refund resulting from the scrapping of a retrospective tax law by India.

Foreign companies done in by the 2012 retrospective amendment to the Indian income tax law sought to put a shovel into the capital gains earned and received abroad in cases where their operating assets were in India, These firms, such as Cairn, for instance, have been threatening the Indian government with seizure of its assets abroad, notably Air-India planes if it did not return the tax thus collected.

In large parts of the western hemisphere, the concept of alter ego holds sway. Air India, after all is a government company. Ergo it is the alter ego of the Indian government. If the Indian government does not refund, Cairn would have orders passed by competent courts in these countries to seize Air India planes in settlement of its dues.

In 2011, the Indian Supreme Court had ruled in favor of Vodafone PLC when it was hauled over the coals by the Indian government for not deducting tax at source from capital gains earned by Hutch Hong Kong from it. The apex Court bailed it out on a technicality and not on merits by pointing out that the business connection rule in Indian income tax law targeted business income and not capital gains. The then Finance Minister Pranab Mukherjee was quick to make amends in the very next Budget by making a clarificatory retrospective amendment roping in capital gains earned and received abroad as well into the income tax net.

Cairn has a substantial Indian presence what with its onshore oil exploration in Barmer, Rajasthan being a huge success. In 2007, it had earned capital gains through reorganization of its worldwide operations and the Indian government seized the dividend income when it was sought to be repatriated post-the 2012 retrospective amendment.

Foreign companies often indulge in tax caper by setting up registered offices in tax havens like Camay Island, British Channel Islands, Panama and other dubious destinations with a view to thumb their nose at governments where they have operations---capital gains on transfer of controlling interest of Indian operations emanate at the place where the registered office is located is their smug assertion. The then Indian government was however not amused and said capital gains emanate where the capital assets---the underlying assets---of the shares are located, period.

The permanent arbitrator at The Hague ruled in favor of Cairns finding fault with the retrospective amendment. Indeed, retrospective amendments have been frowned upon in most of the democratic countries. The Indian Supreme Court, too, has said they are not kosher if they are going to put a fresh tax liability, but they can go through if they give a relief to the taxpayer.

Emboldened by the arbitration verdict, Cairn has been baring its fangs at the Indian government.

The Indian government last month chose to smoke the peace pipe with foreign companies by annulling the retrospective nature of the 2012 amendment relating to tax on capital gains. It now turns out that the olive branch was offered both to disabuse the notion that India was a tax tyrant as well as to avert the ignominy of Air India planes being seized while parked in foreign hangars, the denouement that would have bracketed India with Pakistan and Air India with Pakistan International Airlines which has had the ignominy of its planes being seized by foreign lenders.

For Cairns, too, the olive branch has come as a face-saver. Its gorilla tactics in seizing Air India planes might have given it the momentary and evanescent satisfaction of tit for tat (you seized our dividend, we seize your planes) but would have done incalculable harm to its Indian operations. No foreign company can afford to be in a permanent state of estranged and embittered relationship with the local government.

The fairytale end to the bitter saga of retrospective amendment has warmed the cockles of foreign investors. At the same time, there is a need for building consensus on the international OECD forum against registered office shopping, as it were. If OECD can together come down heavily on base erosion and profit shifting that robs nations--where substantial operations of multinational companies take place--of their just share of taxes, it should also put its foot down on the farce of MNCs resorting to registered office shopping. Camay Island has the dubious distinction of housing a very large number of ‘letter box’ companies aka shell companies.

(The author is a senior columnist and tweets @smurlidharan)

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