Tax terrorism and investment treaties

A recently published overview by anti-investment arbitration NGOs provides a very illustrative summary of the tax terrorism which States increasingly apply against foreign investors with the aim of easily collecting money or otherwise expropriate the investor.

The Yukos v. Russia case in which Yukos was awarded US $50 billion for the expropriation caused by Russian tax measures is probably the best-known example.

Indeed, tax terrorism by which States use taxation as a tool to expropriate foreign investors is a widespread disease. Often, sudden extreme tax hikes are combined with retroactive effect – as has been the case in the solar energy disputes against for example Spain, Italy, the Czech Republic and Slovakia.

The recent developments in the on-going Vodafone v. India dispute illustrates the full impact of the tax terrorism.


Vodafone Group entered India in 2007 through a subsidiary based in the Netherlands, which acquired Hutchison Telecommunications International Ltd’s (HTIL) stake in Hutchison Essar Ltd (HEL) – the joint venture that held and operated telecom licences in India. This agreement gave Vodafone control over 67% of HEL and extinguished Hong Kong-based Hutchison’s rights of control in India, a deal that cost the world’s largest telecom company US $11.2 billion at the time.

The applicable Indian tax law at that time did only apply to purchases of assets of Indian companies based in India, but not to transactions of Indian assets outside India.

Nonetheless, the Indian tax authorities imposed a US $2.5 billion tax bill on Vodafone.

But in January 2012, the Indian Supreme Court passed the judgement in favour of Vodafone, saying that the Indian Income tax department had “no jurisdiction” to levy tax on overseas transaction between companies incorporated outside India.

Subsequently, the Indian Government changed its Income Tax Act retrospectively and made sure that any company, in similar circumstances, is not able to avoid taxes. In May 2012, Indian authorities confirmed that they were going to charge Vodafone about US $4.5 billion in tax and fines.

As a consequence thereof, in 2014 Vodafone started investment arbitration proceedings against India based on the Netherlands-India BIT. Currently, the arbitral tribunal is still being composed after India’s first choice of arbitrator – former Chief Justice of India R.C. Lahoti – declined his appointment.

However, when Prime Minister Modi came to power in May 2014, he advertised himself as a pro-investment man, who would liberalise foreign investment rules and stop harassing foreign investors. Thus, there was hope that the Vodafone dispute could simply be put to rest, in particular after the Indian Supreme Court clearly decided that the tax laws at that time could not be applied to Vodafone’s purchase of Hutchison.

Indeed, in another case related to the Hutchison purchase, Vodafone has prevailed in a US $690 million tax case before the Bombay High Court, marking the latest in a series of victories for international companies against the country’s revenue authorities.

Despite all its defeats before Indian courts, in early February 2016, Anil Sant, deputy commissioner of income tax, reminded Vodafone International Holdings BV Dutch to pay its tax dues. According to that letter, any overdue amounts, even from overseas companies, may be recovered “from any assets of the non-resident which are, or may at any time come, within India”. In other words, if Vodafone fails to pay the US $4.5 billion, its assets in India will be expropriated.

Apart from the fact that this letter is again an attempt to intimidate a foreign investor to pay taxes, which it simply is not obliged to pay, the timing of it is very interesting. Rather than awaiting the outcome of the investment arbitration dispute, India tries to force a “solution” of the matter.

It remains to be seen, how this dispute will evolve. But one thing is clear: States are increasingly using their tax powers to extract money from foreign investors in an easy way.

As the Yukos case and this one illustrate, investment treaties provide a last resort to fight tax terrorism of States.

GIP AG is a specialised consultancy firm, which stands ready to advice any investor on how to obtain the most optimal investment protection.