| Corporate | | | Vodafone may cough up $1 bn more in tax on Essar stake buy | | | TT Correspondent | | 18 May 2011 | | |   British telecommunications major, Vodafone Plc, could be in for a double whammy on the tax front if things don't go its way. The world's largest mobile service operator by revenue fears it may have to cough up an additional $1 billion on its latest purchase of Essar's 22% overseas stake in its joint venture, Vodafone Essar. It is already fighting a capital tax liability of $2.6 billion on its $11.2 billion purchase of Hutchison-Essar in 2007.
Vodafone had bought out the entire 33% stake held by the Ruias in a $5-billion deal in March this year. Essar's 22% stake was held in a Mauritius-based entity, while the remaining 11% stake was held in India. The IT department is also investigating Essar's 22% stake held in Mauritus for capital gains tax.
In a statement on Tuesday on the company's financial results for 2010-11 Vodafone said, "The group does not believe there is any legal requirement to withhold tax in respect of these transactions but if, contrary to expectations, the Authority for Advance Rulings (AAR) directs tax to be withheld, this amount is anticipated to be approximately an additional $1 billion."
Vodafone, through its indirect wholly owned subsidiary Euro Pacific Securities, had earlier sought confirmation from the AAR in India on whether withholding tax is due in respect of consideration payable on the acquisition of Essar Group's offshore holding in Vodafone Essar. The ruling from AAR is expected later this month, said the company. When contacted by TOI, a Vodafone spokesperson in London said; "The transaction falls under the Indo-Mauritian tax treaty therefore we do not think there is any tax liability. We have made an application to the AAR for a determination to this effect."
The company also said it will comply with the Indian foreign direct investment (FDI) guidelines and the acquisition of Essar's 33% stake will take it just over the 74% threshold. "Consequently, we will seek an Indian investor for 1.35% in Vodafone Essar after completion of the Essar option," the Vodafone spokesperson said. Despite the tax woes, the India market grew handsomely for the British firm, which posted an 8.7% decline globally in 2010-11 profit, and a 3.2% growth in revenue, on the back of a 6.15 billion impairment charge for its Europe operations and a sluggish South European market.
Its Indian unit, Vodafone Essar, clocked a revenue growth of 16.2% during the year. The adjusted operating profit was 1.5 million. It is the first time Vodafone Essar has recorded a profit. Growth was driven by a 39% increase in the average mobile customer base and stable usage per customer trends, partially offset by a fall in the effective rate per minute due to an increase in the penetration of lower priced tariffs into the customer base and strong competition, Vodafone said in a statement.
Vodafone Essar, which launched its 3G services in February this year, said 1.5 million customers had activated their 3G access.
EBITDA (earnings before interest, taxes, depreciation amortization) grew by 15.1% driven by the increase in the customer base and economies of scale, which absorbed pricing in the Indian market.
Vittorio Colao, group CEO, said, "The past year has seen further strong performances in our key revenue growth areas of data, emerging markets and enterprise, and we have gained or held market share in most of our key markets." |
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