NCELL Tax Case

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Brief History of NCELL and ownership

NCELL Axiata Limited is the Nepal’s first private mobile service provider. Andy Chong was the key person to start Mero Mobile in 2004. After 4 years, it was acquired by Reynolds Holding Company (Parent Company – Teliasonera (Norway)) who rebranded it as NCELL in 2010.  On April 12, 2016, Axaita (UK) (Parent company - Axiata Berhad (Malasia)) purchased 100% shares of Reynolds Holding and indirectly purchased NCELL. After ownership was transferred to Axiata group, NCELL was transformed into a public limited company. On August 3, 2020, NCELL's name was changed to "NCELL Axaita Limited."

Since, it’s establishment, NCELL had ownership structure as 80% foreign investment and 20% domestic investment (held by Niraj Govinda Shrestha). NCELL had initial paid up capital of 10 crore, of which 8 crore was foreign investment and 2 crore was national investment.


Origination of the case/ Ownership Transfer

It is found that ownership of NCELL was transferred several times. However, tax issue on transfer was raised specially when Teliasonera transferred its holdings on Reynolds Holding to Axiata group and Niraj Govinda Shrestha transferred holding to Sunivera Capital Ventures Pvt. Ltd. The summarized ownership transfer can be illustrated as:


Upon the transfer of ownership of Reynolds Holding, NCELL sought an advance ruling from the Inland Revenue Department (IRD) regarding taxation and compliance issues. This request was prompted by the absence of clear laws and guidelines pertaining to indirect ownership transfers up to that point. Unfortunately, the IRD was unable to address the matter and provide a response to NCELL.

In the event of an 80% ownership transfer in NCELL, the holdings of NCELL remained unchanged. However, there was a shift in the ownership of Reynolds Holdings, transitioning from Telesonera to Axiata. This constituted an indirect transfer of NCELL's ownership. Reynolds Holdings, merely a paper company situated in the tax haven, British Virgin Islands, Nevis facilitated the share transfer outside Nepal. Consequently, the transfer involved a company located outside Nepal, and at that time, Nepal lacked sufficient legal provisions to address such issues of indirect transfer of ownership.

Legal Provision as per Income Tax Act, 2058 and Double Tax Avoidance Agreement with Norway

·       As per Section 35 (a), IRD may re-characterize any arrangement or any part of such arrangement made or attempted to be made as a part of a tax avoidance scheme.

 ·       As per Section 67 (4), If a property located in Nepal or a liability to be borne in Nepal is involved, the source of profit or loss resulting from the disposal of the property or liability will be considered to have originated in Nepal.

 ·       As per Section 95Ka (2), Any gain on disposal of interest in resident entity shall be taxed at the rate of 25% if transfer is made by non- resident entity.

 ·       As per Article 13 of the Double Tax Avoidance Agreement signed between Nepal and Norway, Gains derived by a resident of Contracting State from disposal of shares shall be taxable only in the contracting state of the resident entity.

·       As per Section 73 (5) An entity shall not be entitled to enjoy tax exemption or tax deduction facility as per DTAA, in case 50% or more portion of the vested ownership of that entity is owned by natural persons or by the entities in which any natural person has no interest and, for purposes of the agreement, the persons or entities are residents of both Nepal and of the other country party to the agreement.

 

Key Court Decision and Interpretation

 ·       As Telesonera is a paper company without any employee and office, located in tax heaven island, the considered as an attempt made for tax avoidance.

·       More than 50% of underlying ownership of Telesonera (Norway) is held by Telesonaria AB (Sweden), the transaction cannot avail DTAA benefit as per Section 73 (5) of the Income Tax Act, 2058.

·        On levying capital gain tax on buyer, Supreme court emphasize that buyer should first inquire about the liabilities (due diligence) of the seller before any purchase. Hence, tax shall be levied on other party of the transaction (buyer, Axiata) since seller Telesonera had already escaped.

Based on the decision and interpretation of supreme court, Large Taxpayers Office (LTO) determined combined tax liability of NCELL, along with Axiata at R.s 62.63 billion and ordered to settle remaining tax liability of 39.06 billion (after deducting previously paid tax) within a week. After the decision, Axiata (UK) filed an application to ICSID (International Centre for Settlement of Investment Disputes) claiming that the country’s policy of levying capital gain tax is not in accordance with the Bilateral Investment Treaty between Nepal and UK. ICSID issued an order in favor of government of Nepal stating that tax levied by government is based on valid and reasonable ground.

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