The shells of Ncell
- There is rumination about whether TeliaSonera’s transaction is an act of outright tax evasion or outrageous tax planning
Apr 23, 2017-TeliaSonera’s tax evasion took place despite the integrity pact for ethical business practices signed between Transparency International’s local chapter and Ncell. Recent events have also shown how Reynolds Holding, based in Norway, can fool the Nepali exchequer.
On April 9, Prime Minister Pushpa Kamal Dahal responded to the grilling by the Public Accounts Committee (PAC) and said that there is no ‘if’ or ‘but’ in collecting taxes. He also assured the PAC members that even if tax collection fails, Nepal need not worry, as Ncell is still operating here. Instead of providing honest dialogue and employing negotiation methods, it sounds like the PM is resorting to methods that he employed during the conflict (1996-2006). Meanwhile, TeliaSonera has reiterated its position that it is not obliged to file a tax return or deposit tax to the authorities here.
The crux of the matter
The debacle on capital gains tax started in December 2015 when TeliaSonera, a Sweden-based parent holding company of Ncell, divested 80 percent of the ownership shares in Ncell to a Malaysia-based company, Axiata, for $1.365 billion as part of its divestment programme in Eurasia. The transaction entailed $1.03 billion for TeliaSonera’s 60.4 percent holdings and $335 million for Kazakhstan-based Visor Group’s 19.6 percent holdings. Similarly, the remaining 20 percent owned by a local partner Niraj Govinda Shrestha will be sold to Bhavana Singh Shrestha (Sunivera Capital Ventures) for $48 million. Given the size of the transaction, this must be the largest deal ever conducted in Nepal. This single transaction is more than 20 percent of Nepal’s budget. The deal was finalised in April 2016.
Nepali policy makers and bureaucrats are used to acquiring knowledge from Muluki Ain and the local income tax act. They must have been baffled by the sheer size of the transaction that involves companies from countries like Singapore, Norway, Netherlands, Sweden, Malaysia and the UK. There is much rumination about whether the transaction is an act of outright tax evasion or outrageous tax planning. Is this an issue that the Cabinet or the Tax Office has to deal with? Who is liable to pay the tax here—the seller, the buyer or the company being sold? Will the company pay the tax in Norway and not in Nepal to avoid double taxation? Are the gains on capital transactions subject to regular income tax act? And for that matter, how would capital gain be computed? What impact will the decision have on Foreign Direct Investment (FDI) in Nepal? In spite of being a profitable venture, why did TeliaSonera decide to leave Nepal?
The policy makers will soon learn that the business of FDI is not only about rolling out the red carpet for investors. It is as much about keeping them happy. It is also about facilitating Nepali investments abroad. It is reported that there have been a number of changes in Ncell ownership. If this is true, who paid capital gain taxes, when were they paid, and how much was paid? In 2016, the Basel Institute of Governance in Switzerland ranked Nepal 12th out of 148 countries in its annual Anti-Money Laundering Index (AML). In 2014, we held the 14th position. The implied meaning here is that, as with labour, there is also a huge (illicit) outflow of capital from Nepal.
What is fascinating about this deal is not the size of the transaction and the possible evasion of capital gain tax that, as per the Office of Auditor General, runs over Rs32.2 billion. The background of the parties involved, how TeliaSonera came to acquire NepalSpice (Mero Mobile) and Nepal Satellite Telecom (Hello Nepal), the sources of money, and the companies registered in islands that are tax havens all provide food for thought. The Ncell deal could be an interesting case study on the confluence of business and politics in Nepal. It points to the core: in Nepal, business is politics and politics is business. It is fascinating as it involves the known and the unknown, and the dubious and obvious nouveau riche of Nepal.
In the wake of liberalising the telecom business, in September 2001, Modi Group of India (55 percent), Khetan Group (40 percent) and Spice Cell (5 percent) acquired the Letter of Interest to operate Spice Nepal. However, by September 2004, the license was acquired by Raj Group (95 percent), belonging to the son-in-law of the then king Gyanendra. How and why the shared ownership of the Modi and Khetan groups was transferred to the Raj Group is still shrouded in mystery. Understanding the multiple changes in ownership structure between and within Nepali shareholders is a mind-boggling exercise. The entry of new actors like Upendra Mahato and Ajaya Sumargi eventually led to the entry of TeliaSonera through layers of holding company structures, further adding to the confusion.
Confluence of business and politics
The acquisition of Spice Nepal by TeliaSonera is just one part of the story. Nepal Satellite Telecom, originally owned by Ajaya Sumargi and others was also acquired by TeliaSonera in 2008, while the Maoist-led government was in power. In April 2012, TeliaSonera paid Mahato Rs3.67 billion and acquired 75 percent of the shares of Nepal Satellite Telecom from Airbell; the remaining 25 percent of the shares are with Sumargi. However, in 2013, with the controversy over cross-holding structure, TeliaSonera sold off 57 percent of shares to Jodhar Investment at a loss of Rs6 billion. I will not bother the readers with a complex web of share transfers and layering of holding company structures. What is interesting here is that Ncell seems to have been a confluence of seemingly antagonistic royalist and Maoist forces. This is the reason why I say business is politics and politics is business in Nepal. We might have attained political republicanism, but the same cannot be said for economic republicanism.
Besides collecting taxes from TeliaSonera as reported in the media, will our outgoing PM be able to launch investigations into the past Ncell deals? I am of the opinion that TeliaSonera will not pay a penny in taxes. This is evident in the gross undervaluation of the 20 percent share transfer of Niraj Govinda Shrestha (valued at $48 million) compared to the 80 percent share transfer by TeliaSonera (valued at $1.365 billion). And the 20 percent of shares owned by Niraj Govinda Shrestha is nothing more than an official arrangement to meet legal requirements that call for a 20 percent local partnership.
Manandhar is a freelance consultant
Published: 23-04-2017 08:07