The government should not hesitate from collecting the tax because Ncell’s valuation had soared as hundreds of thousands of Nepalis purchased their services

-Minendra Rijal, former information and communication minister

Kathmandu, February 2

The Inland Revenue Department today made a complete turnaround on the issue of capital gains tax that the government could levy on the proposed Ncell buyout deal, as it faced criticism for making an attempt to deprive the country of tens of billions of rupees in revenue.

During the hearing of the Parliamentary Committee on Development last week, IRD Director General Chuda Mani Sharma had testified that TeliaSonera, the largest shareholder in Nepali telecom operator, Ncell, would not be subjected to capital gains tax on the stake it was planning to sell to a Malaysian giant, because ‘it is a company registered in Norway with which the government has signed double tax avoidance agreement’.

During today’s meeting called by the Parliamentary Committee on Public Accounts, Sharma, however, made a complete u-turn and said his department was still conducting studies on whether profit generated by TeliaSonera through the sale of its stake in Ncell could be taxed.

Sharma was forced to deviate from his previous statement after he faced criticism from his colleagues at the Ministry of Finance and other experts, who say TeliaSonera’s investment in Nepal has been diverted through another company called Reynolds Holdings, registered in Saint Kitts and Nevis in the West Indies, with which the government has not sealed double tax avoidance agreement.

Sharma, on the other hand, has been trying to drive home the point that the country ‘should think of consequences’ before trying to extract the tax amount, as the move could set a bad example for ‘foreign investors eyeing Nepal’.

He made similar argument today, but was rebuked by Minendra Rijal, Nepali Congress lawmaker and former information and communications minister. “The foreign direct investment issue does not fall in your domain. There are other bodies, like the finance ministry, which looks into the matter. So, it would be better if the Inland Revenue Department focuses on not losing a single penny in revenue,” Rijal said.

The issue of capital gains tax on proposed buyout deal has become a topic of debate ever since TeliaSonera, in December, said it was selling 60.4 per cent of its stake in Ncell, the largest private sector telecom company in Nepal, to Malaysian giant, Axiata, for $1.03 billion.

TeliaSonera, a telecommunications service provider in the Nordic and Baltic countries, Eurasia and Spain, is headquartered in Sweden. But the investment in Nepal has been made via Norwary-based TeliaSonera Norway Nepal.

TeliaSonera Norway Nepal, on the other hand, has 75.45 per cent stake in Reynolds Holdings.

Another 24.55 per cent stake in Reynolds is held by SEA Telecom Investments BV, a company owned by Kazakhstan-based Visor, which, in turn, owns 19.6 per cent of Ncell shares. (SEA Telecom is also selling its stake in Ncell to the Malaysian company for $335 million)

Together, Reynolds has 80 per cent stake in Ncell, which makes it the real owner of the Nepali telecom company.

If Reynolds is the real owner of Ncell and since it is based in Saint Kitts and Nevis, with which the government has not signed double tax avoidance deal, why hesitate to collect the tax? This is the argument made by those who want the government to slap capital gains tax on the Ncell deal.

If the government is able to tax the deal, 25 per cent of the profit made from the sales could flow into the state coffers.

Ncell has a paid-up capital of around Rs 100 million. But Ncell’s 80 per cent stake is being sold for $1.365 billion (approximately Rs 149 billion). This means Nepal stands to earn tens of billions of rupees in revenue from the deal.

“The government should not hesitate from collecting the tax because Ncell’s valuation had soared as hundreds of thousands of Nepalis purchased their services,” Rijal said. Besides, experts say taxes are collected at the income source, which is Nepal.

It is essential to immediately sort this problem out, as Axiata, on December 22, sought advance ruling on the matter. Such decisions have to be made within 45 days, which means Sharma’s Inland Revenue Department has until Thursday to decide on the matter.

Lawmakers today urged Sharma to take the decision carefully. This is because the Department serves as a primary level of court and a mistake could cost dear to a country, which has lately been facing difficulty in meeting revenue target because of supply disruptions.