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Kraft likely to have robust defence in India tax probe, says legal expert

By Jane Byrne , 06-Jan-2011

Related topics: Suppliers

Kraft is likely to have a robust defence in relation to the reported investigation into any tax bill it might be liable for following its takeover of Cadbury in February 2010, claims a UK tax law analyst.

According to Indian media outlets, the Ministry of Finance is examining whether there was any tax evasion by Kraft in relation to the sale of Cadbury's Indian subsidiary following its multi billion takeover of the UK confectionery group.

The Indian government’s reported probe follows the filing of a petition in the Delhi High court late last month by a social activist who claimed that Kraft owes taxes on the sale of the Indian division.

David Jervis, Eversheds global head of tax, speaking to ConfectioneryNews.com this morning said: “Given the publicity surrounding the Vodafone case it is unlikely that Kraft would not have sought advice on India tax rulings and whether withholding would apply in relation to Cadbury India subsidiary,” he said.

“Kraft must have concluded,” continued Jervis, “that Indian tax rules don’t apply in this case.”

According to Indian tax experts cited in India media reports, the transfer of Indian assets to new ownership means taxes should be paid locally.

The US food group told this publication that it is fully committed to complying with Indian law. A spokesperson for Kraft added that the company is “aware of the public interest petition that was filed in the High Court of Delhi.

The Court has not granted any reliefs to the petitioner and has instead suggested to the petitioner to file a representation with the Government and the Income tax department so that they could take appropriate steps as advised in law. “

However, the US food group said that they have not yet had any formal inquiries from the Indian government.

The lawsuit filed against Kraft follows similar disputes about tax liabilities in India and international takeovers. Last year, UK mobile phone company Vodafone was landed with a $2.5bn Indian tax bill, for its takeover of Hong Kong's Hutchison Whampoa, which included a large stake in Hutchison's Indian unit.

And British brewer SAB Miller is embroiled in a similar row over its 2006 takeover of the Foster's Group's Indian business. The investigation is understood to be ongoing but SABMiller's reported line of argument was that it had no tax obligation as the transaction was completed beyond the jurisdiction of the Indian tax authorities.

According to Jervis, Indian tax regulations could soon be amended to include additional anti-avoidance rulings. “While the modifications might result in even more restrictive legislation, they could also provide greater clarity in relation to when exactly companies would be liable for tax related to the sale of an Indian subsidiary of an international group,” he said.

He said that the Kraft/Cadbury dispute along with the other tax liability rows could send a note of caution to international companies looking to acquire multinationals with subsidiaries based in India. ‘The hidden costs of such deals should not be overlooked and the acquisition price should reflect contractual tax impositions,” stressed Jervis.