The first ever biggest corporate deal of the country landed in controversy as the Telia company which offloaded its Nepal share of telecommunication service provider Ncell to Axiata Group refused to pay Capital Gains Tax (CGT). Axiata Group Berhad (AxiataMalaysia), through its wholly-owned subsidiary, Axiata Investments (UK) Limited had purchased 80% stake at 1.36 billion (Rs 145.40 billion based on erstwhile exchange rate). As per the tax law, the purchaser is liable to pay 15% of the capital gain tax deducting from the total payment to the seller and remaining 10% of the CGT collected from the seller. Out of 25% CGT, the Axiata Group, which acquired Ncell’s 80% share has paid 15% of the CGT as tax deduction at source (TDS).
However, the Telia company has refused to pay the remaining 10% of the CGT stating it as an offshore deal and Nepal’s double tax avoidance agreement (DTAA) with Norway. Failure to recover tax from the Telia company, tax authorities of the country have slapped the remaining 10% CGT with penalty on the Axiata company which entered into Nepal’s operation of telecommunication service provider, Ncell.
The tax dispute has prolonged since fiscal 2015-16. Following the Auditor General’s interpretation of the Ncell tax dispute, the tax administration has been pressurised to recover the tax. The Auditor General’s report states that the purchaser is liable to pay tax on offshore transactions.
On 16 April, 2019, the Large Taxpayers’ Office (LTO) slapped Rs 62.63 billion as tax and penalty following the Supreme Court’s verdict on Ncell tax dispute, and urged the telecom service provider to submit Rs 39.06 billion within a week. The Axiata Group has so far paid Rs 23.57 billion as CGT and Rs 62.63 billion is total taxes. In this regard, Ncell was asked to pay the remaining Rs 39.06 billion.
However, experts have said that the tax assessment process of the LTO does not abide with the minimum norms and values. “The tax assessment process could take three months because the tax administration needs to take the tax payer into confidence to recover disputed tax amount following the Supreme Court’s verdict,” a highly placed source at the Inland Revenue Department told Business 360.
Following all these developments, the Axiata Group’s UK subsidiary - Ncell filed a request for arbitration with the International Centre for the Settlement of Investment Disputes (ICSID) on May 2, regarding the capital gains tax bill slapped by tax authorities.As per the section (36) of the ICSID Convention, the Secretary-General has to register the request of arbitration in the initial phase if the request falls under its jurisdiction. The SecretaryGeneral of ICSID registered a request for the institution of arbitration proceedings and the arbitration request is pending till date as per ICSID website. (https://icsid.worldbank.org/en/Pages/cases/casedetail.aspx?CaseNo=ARB/19/15)
The telecommunication service provider has claimed that the tax authority has incorrectly calculated the amount. Axiata stated that the governments of the UK and Nepal have a bilateral investment treaty covering the promotion and protection of investments. The claims made by Axiata Investments (UK) and Ncell relate to the tax authority’s “conduct in contravention of its international law obligations under the bilateral investment treaty”.
The Office of the Prime Minister and Council of Ministers and the Ministry of Foreign Affairs have been notified regarding the arbitration request of the Axiata Group Berhad.
The Bilateral Investment Promotion and Protection Agreement between UK and Nepal has provision to file a case in any investment dispute to international arbitration. Based on this provision, the Axiata Group, UK has filed its case with the ICSID. However, there have been debates on the jurisdiction of ICSID in this particular case.
Root of the dispute
The Telia Sonera Norway completed the process of share transfer to Axiata Investments UK on 11 April, 2016 and a notification was given to the Government of Nepal. The Axiata Berhad Malaysia had purchased holding company named Reynolds Holdings that holds 80% stake of Telia Sonera’s Nepal operation from Sweden. Involvement of the Telia Sonera, Norway and Axiata Investment UK make the case complex and further complexities could surface in coming days in the recovery process of CGT. In this deal, the understanding of the seller and purchaser is that Nepal’s tax law is not be applicable in offshore share transactions. However, the verdict of the Supreme Court issued on 6 February, 2019 and the details of the verdict disclosed on 9 April, 2019 has clearly said that, ‘In case of offshore transactions the liability of CGT (25%) goes to its new owner Axiata Berhad, Malaysia. The Large Taxpayers’ Office has levied the tax bill following the verdict of the apex court. However, the dispute entered a new phase along with Ncell file writ petition to the Supreme Court against the tax assessment of the LTO and its request to the ICSID for arbitration. The latest development has prolonged the tax dispute and made the issue more complicated.
Tax assessment
The events unfolding show that the dispute following the tax assessment of the LTO will go longer. The telecommunication service provided has so farsubmitted Rs 21.54 billion as CGT of offshore transaction and Rs 2.02 billion as penalty for exceeding time of tax submission. Deducting the tax amount filed so far, the LTO on 16 April this year asked to file Rs 39.06 billion in tax. However, the telecommunication service provider had said that the liability of the CGT to the owner Axiata Berhad Malaysia is only Rs 14.36 billion if it has to pay 10% CGT which was supposed to be submitted by the selling companyTelia Sonera. Ncell filed the writ petition just before the deadline of a week given by the LTO to pay up. In the writ petition, Ncell has claimed that the company reserves rights to seek international arbitration in investment dispute. The Supreme Court had called for both parties in a hearing and asked that the LTO not recover the tax before the final hearing.
Jurisdiction of ICSID
Nepal is a signatory of the ICSID convention. The ICSID can hear the investment dispute between Axiata Investment, UK and the Government of Nepal. The country has so far signed BIPPA (Bilateral Investment Promotion and Protection Agreement) with UK, France, Finland, Germany, Mauritius and India. The agreement with India however is yet to ratified by the parliament. Nepal and UK have given consent to the ICSID to hear investment disputes mainly in the cases of foreign direct investment (FDI). The jurisdiction of ICSID is still unclear on the current dispute of CGT, however it will largely depend on how the ‘investment’ and ‘foreign investment’ will be interpreted, according to experts. “The deals in Ncell’s share transfer is not transparent and intended to evade tax,” some claim.
Section 41 (2) of the ICSID convention has also secured the rights of the countries to submit objections with evidences when particular issue related to the particular country do not fall under the jurisdiction of the ‘arbitration tribunal’. However, Nepal has not filed objections till date.
