In a recent development that could have significant implications for Nepal's fiscal landscape, the government's efforts to recover an additional tax of around Rs57 billion from Ncell, one of the leading telecom companies in the country, may face hurdles. This comes in the wake of an international tribunal suggesting that Nepal should refrain from imposing further taxes on the 2016 Ncell buyout by Malaysian firm Axiata.
The Backdrop of the Tax Dispute
The International Centre for Settlement of Investment Disputes (ICSID), a globally recognized dispute resolution body established by the World Bank, recently issued a verdict in favor of the Nepal government. This ruling pertained to the dispute over the determination of capital gains tax (CGT) levied on Ncell regarding its acquisition by Axiata. The verdict saved the government from potentially paying as much as Rs66 billion to Ncell and Axiata Investment (UK) in compensation for losses caused to Ncell, along with an annual interest of 16 percent and arbitration expenses.
The Implications of the Verdict
While the verdict was a significant win for the Nepal government, it also indicated that Nepal should refrain from demanding any further tax, fees, penalties, or interests in relation to the transaction. This suggestion, as per Ncell's press statement, is based on the observation that a further tax assessment could violate the Income Tax Act and qualify as a breach of the bilateral investment treaty between Nepal and the United Kingdom.
The Potential Impact on Tax Recovery
The ICSID's indication could potentially obstruct the government's attempts to recover corporate income tax that arose from TeliaSonera’s sale of Ncell to Axiata. This additional tax liability, determined by the Large Taxpayers’ Office, amounts to around Rs57 billion as per section 57 of the Income Tax Act-2002. This section states that if the ownership of any entity changes by 50 percent or more compared to its ownership until before the last three years, the entity shall be deemed to have disposed of the property under its ownership or the liability borne by it.
The Road Ahead
Despite the ICSID tribunal’s indication against imposing further tax liability on Ncell, it has not explicitly stated so. Moreover, the case over the same issue is pending at the Supreme Court of Nepal. Therefore, the final decision on the additional tax recovery from Ncell remains uncertain. However, the ICSID verdict has set a precedent that could influence the outcome of similar disputes in the future.
The ongoing tax dispute between the Nepal government and Ncell underscores the complexities involved in international business transactions and their tax implications. While the government aims to ensure fair taxation, it also needs to consider the potential impact of its decisions on foreign investment and the business environment in the country. The final outcome of this dispute will not only affect the fiscal landscape of Nepal but could also set a precedent for similar cases in the future.