Friday, February 8, 2019

Ncell ordered to pay capital gains tax

On September 6, the Supreme Court ordered Ncell and Axiata to pay capital gains tax. This long pending order puts to rest one of the most contentious and protracted capital gains tax issues in Nepal. Taxes were avoided when ownership of Ncell was transferred from one company to another. Companies need to pay 25% in CGT per Income Tax Act. However, TeliaSonera did not pay taxes even though it made profits from the sale and repatriated “income”. 

Here is a brief outline and key points from a news story in myRepublica:
  • With this decision, the apex court has set a precedent that any firm buying into another company may have to pay such tax if the seller hadn't cleared its tax liabilities on the bought portion. Malaysian company Axiata had bought Reynolds Holdings, which held a majority share in Ncell, from TeliaSonera for $1.03 billion. It was a wholly-owned subsidiary of TeliaSonera and believed to be registered in the tax haven of Saint Kitts and Nevis.
  • Ncell has already deposited Rs 23.57 billion in two installments as applicable tax on the profit generated through the sale of the telecom company. It paid Rs 9.97 billion in May, 2016 on the basis of its own calculations. It again paid Rs 13.60 billion on June 4, 2017, bowing to intense pressure and criticism from a cross-section of society.
  • TeliaSonera, a Swedish-Finnish company, has not paid any capital gains tax on the sale of its 80 percent share in Ncell to Malaysian company Axiata in April 2015.
  • The Large Taxpayers Office determined that Ncell needed to pay Rs 60.71 billion in capital gains tax and fines and interest calculated as of June 17, 2017. A capital gains tax of Rs 35.91 billion was determined and fines and interest made for the total figure of Rs 60.71 billion. 

The LTO wanted TeliaSonera to pay CGT and filed a case in the court, which halted transfer of income outside of the country. However, Justices Om Prakash Mishra and Kedar Prasad Chalise of the Supreme Court, on December 18, 2017, took a decision in favor of TeliaSonera and allowed it to repatriate "income" (which included taxes it should have paid to the government). There are reports that investment in Ncell was used as a conduit to launder undeclared income

The order has come just one month before the Nepal Investment Summit 2019, where investors will be asking questions about repatriation of income by foreign investors and clarity on tax regime. The finance minister said that the government will determine how much Ncell owes in capital gains taxes and accumulated interest and fines after it formally receives the order from the Supreme Court. 

In other news, a recent Cabinet meeting approved hedging regulations to lower foreign exchange risks in projects with foreign investment. This is expected to be especially helpful in the energy sector. Additionally, the central bank approved the application for license to establish Infrastructure Development Bank, which has Rs20 billion paid-up capital.