With so many ambiguities in tax law and foreign direct investment law, it is easy to push any deal into controversy. The recent tax issue of the NCELL is one case.
Although Nepal needs to deal with multi-nationals, Nepal’s tax laws and other laws related to foreign investment are old and they are inadequate to handle big transactions of big foreign companies. The laws were drafted to deal with a few million or a billion rupees in transactions.
Until the government formulates explicit acts dealing with foreign investment and tax related issues, more controversies are likely in the future, whenever the major deal involving a large amount of money takes place.
“Looking at the current disputes between NCELL and the tax office of Nepal in regard to capital gain tax, the government of Nepal needs to revamp and amend the existing tax laws to deal with these kinds of issues,” said corporate lawyer Gandhi Pandit, chairperson of Gandhi and Associates. “When Nepal is exposing itself into a global market, it needs to update itself making changes in Nepalese laws to come up with international standards so that foreign investors should be comfortable in investing huge capital in infrastructure projects.
As Nepal’s bureaucratic set up does not have the requisite experiences and exposure in dealing with big transactions, there is the need to set up separate and broader institutions to deal with this kind of issue.
“Enforcement of law related to foreign investment should not be left to the hands of bureaucrats who are very conservative in facilitating foreign investment in Nepal. The present attitude of bureaucrats is not in favor of promoting foreign investment. Revamping existing legal system as well as orienting the bureaucrats of Nepal to positive direction is the present need of Nepal. NCELL tax issue is an issue to be learnt by the government how the multinational companies are well learned and well equipped in dealing with any kind of law related to foreign investment. This is only one aspect of investment barrier in Nepal. Another major issue in regard to promoting foreign investment in Nepal is introducing project financing rules and policies,” said corporate Attorney Gandhi Pandit, chairperson of Gandhi and Associates.
The present tax issue came up following TeliaSonera Norway Nepal Holdings AS (Telia Norway) sold the shares of the off-shore company Reynolds Holdings Limited. There was a controversy over the tax on gains.
Ncell has paid Rs 9.96 billion capital gains tax to the government. The telecom operator informed about the payment of the tax by organizing a press meet.
“We paid the tax as per the directive of the Large Tax Payers Office (LTPO),” Ncell said in a statement distributed at the press meet, adding: “We had been directed to calculate and deposit 15 percent of the total gains involved while TeliaSonera Norway Nepal Holdings AS (Telia Norway) sold the shares of the off-shore company Reynolds Holdings Limited.”
Reynolds owns 80 percent of Ncell shares. Ncell officials said that the deposit of the advance tax was made to the government under the company’s commitment to work in close partnership with the government and people of Nepal.
“We reiterate that the transaction involved the sale of Reynolds shares by Telia Norway, and Ncell had not been involved in the transaction at all, neither has it made any payment nor received any payment arising from the transaction,” reads Ncell’s statement.
Claiming that the company has consistently complied with the laws of the country and is also the largest taxpayer to the government, Ncell also informed that the company has decided to extend its fullest cooperation to the government of Nepal in reaching a resolution of prevailing issues with respect to the levy of capital gains tax.
“Notwithstanding the fact that the computation and declaration of capital gains tax, if any, is the responsibility of the seller of shares, the company had proceeded to place a deposit of advance tax on behalf of the previous owners of Reynolds,” the statement added
As there is a lacking in the tax regime, the CGT in share transaction of Reynolds has become an issue in the country. The government managed to collect tax from Ncell even though the responsibility of paying CGT rests on the seller, according to existing laws.
TeliaSonera, on December 21, announced to divest its share and exit from Nepal as per its strategy to pull out from Eurasian markets. Questions about CGT were raised from that very date. TeliaSonera has been maintaining that transaction of Reynolds, which is based outside Nepal, out of jurisdiction of Nepali tax law.
Ncell Pvt Ltd (Ncell) announced that the company has contributed approximately Rs 129 billion to the national treasury, in the form of fees, royalty and taxes to date.
“As of May 4, Ncell has contributed Rs 128.63 billion to the government in the form of tax, royalty and fees. I am encouraged that Ncell has made significant contributions to state treasury, which serves as an important source of public funding in areas where it matters the most — such as building roads, schools and medical infrastructure that are core to the wellbeing and welfare of the people of Nepal,” the media release quoted Simon Perkins, managing director of Ncell, as saying.
“In 2014-15, Ncell paid more than Rs 28.6 billion to the government as tax, royalty and fees,” the release further read, with Perkins quoted as further saying, “We wish to continue with this trend and maintain our lead as the largest taxpayer for the longer-term.”
"I am encouraged that Ncell has made significant contributions to the state treasury which serves as an important source of public funding in areas where it matters the most," said Simon Perkins, managing director of Ncell, said in the statement.
According to him, Ncell paid more than Rs 28.6 billion to the government as tax, royalty and fees in 2013/15 alone. He expressed the commitment to continue with this trend and maintain lead as the largest taxpayer of the country.
Ncell says it has paid Rs 9.96b capital gains tax to the government.
Although the issue has subsided for now, many tax rows are likely to arise in the future in case Nepal does not update its legal system, including the tax law, as per international standards.