Recent Efforts by India and Other Jurisdictions to Tax Indirect Transfers of Companies: The Kraft-Cadbury and Vodafone Transactions

Sullivan & Cromwell LLP - March 2, 2011

Indian officials have recently begun investigating whether Kraft Foods should have paid tax in India on its $19 billion purchase of Cadbury in February 2010, on account of Indian business units that were indirectly transferred to Kraft in the sale. This is the second recent instance in which Indian tax authorities have scrutinized an indirect transfer that occurred as part of a global M&A transaction. Since 2007, the indirect sale of a majority stake in Hutchison Essar Limited (“Hutchison Essar”), an Indian telecommunications company, to a subsidiary of Vodafone has been the subject of litigation over Vodafone’s potential liability for failing to withhold and remit, when it paid the purchase price, approximately $2.5 billion in capital gains tax. Vodafone is waiting for a hearing on the matter from the Indian Supreme Court, which is currently scheduled to take place during July 2011. These cases appear to indicate an increasing willingness by Indian tax administrators to aggressively examine global M&A transactions that have an Indian component, regardless of whether the transfer involves a direct transfer of Indian assets. Other jurisdictions, including China and Peru, have also made recent changes to their tax law or administrative practice that assert taxing jurisdiction over indirect transfers of local business units.