When I first wrote a blog on Ncell tax case last year, Nepal Government had just started discussing on if tax should be levied and what amount of tax should be collected from the deal. This blog analyses the position with respect to further and recent developments.
- 8 May 2016- Ncell paid Rs. 9.96 billion as capital gain tax. It was also reported that Ncell declared and paid tax under Sec. 57, Change in Control provisions of the law. Information relating to further assessment by tax office is not yet public and is expected to be in process.
- 8 March 2017- The cabinet meeting decided that the capital gain tax is payable by Teliasonera (the seller) and not the buyer. . The finance minister reinforced this in his response to public accounts committee.
- 14 March, 2017- The Office of Auditor General is said to have directed the Government to collect additional tax of Rs. 26 billion from NCell.
As I noted in my earlier posts, and interview in Artha Sarokar TV program, our current legal provisions do not bring indirect tax into ambit of tax law, but the tax office have the right to disregard treaty benefit or corporate structures in case of sham entities, provided they are able to prove it using General Anti Avoidance Rules.
But after Ncell deposited Rs. 9.96 billion as Tax Deduction at Source, tax department is now relieved of the difficult task of establishing a sham entity, at least for 15% WHT. In other words, Ncell accepted that they have a withholding tax responsibility as per Sec. 95Ka of the Act with WHT rate being 15%. This in fact is suicidal for Ncell, and a decision taken on haste, without considering the legal consequences of accepting the liability, if the tax department moves further with WHT assessment.
So, for the WHT portion of 15% it is now irrelevant to discuss whether the transaction is taxable in Nepal or not.
What should the tax department do now?
As noted above, Ncell has accepted that they had a Withholding tax liability (WHT) as per the law. This means the tax department should take the following course:
- To verify how selling price and cost price regarding the transaction have been calculated and whether the gain amount is correct as per Sec. 36 of the Act.
- To check whether the cost price calculation can be substantiated with appropriate documentary evidences. The cost price can include:
- The cost of purchase of shares
- The cost of holding shares
- The cost of disposal of shares.
- In case of Teliasonera, some or many of these expenses could have been expended out of Nepal, and documentary evidences might not be available with Ncell. As Ncell accepted the WHT responsibility, it is now for Ncell to provide the evidences to tax office.
- In case of failure to provide adequate supporting, tax office can assess further WHT liability at the rate of 15% on each unsubstantiated expenses, plus interest on such WHT assessed.
What is the tax rate and who is liable to pay tax?
There is much debate around the tax rate for this gain and who is liable to pay it.
Ncell by its act of paying WHT has accepted the liability of 15% WHT on gain. We may consider the normal tax rate of 25%, but if tax office assesses tax additional to WHT (+10%), it will be a herculean task to really make Teliasonera to pay it. Teliasonera has repetitively denied any tax liability in Nepal, and acceptance of WHT by Ncell does not in any way make Telia liable for additional 10%. There is no legal base to assess NCell for the additional 10% liability, as instructed by Office of Auditor General. There are two issues to consider:
- First tax office should be able to raise an assessment order to Teliasonera for this additional tax. There is a standard legal process for that to be followed. In addition, proving a sham entity, refuting the treaty benefit and making Teliasonera liable demands an extensive exercise.
- Whether the existing legal provisions would be sufficient to bring a company with no existing set-up in Nepal can be dragged to Nepalese court is another issue to consider.
Teliasonera required approval of Nepalese government authority for sale of shares. That was the time when our authorities should have been proactive to discuss these tax aspects. Back in April 2016, within the IRD there was an internal report saying Teliasonera is liable to pay tax in Nepal. But we did not take action in time, and even today instead of tax authorities moving forward with re-assessment of WHT, the issue is being discussed in the cabinet and Public Accounts Committee.
On 16th March I had tweeted, “Supreme authority to interpret tax law is the court. Both Ncell & Government took a wrong path in Capital Gain Tax case & we are left with confusion & a mess”. Indeed. A tax practitioner like me would always wish that we levy tax within the purview of legal provisions, and the best authority to decide whether Teliasonera is liable to tax in Nepal would have been the Supreme Court. Lets hope we could see that someday.
At this hour, tax department should at least begin WHT assessment of Ncell by recalculating gain as per Sec. 36 because Ncell has already exposed itself to 15% WHT liability without any doubt.
Note to the readers:
- The Income Tax Act does not use the word Capital Gain Tax, and so this term is used for general understanding only. As per law, the tax paid is income tax, but collected as deduction from source.
- It makes no difference whether we call WHT or Advance tax to refer to tax deposited by Ncell. It would still be regarded as advance income tax of Teliasonera.