Cairn Energy PLC and Government of India - Tax background
In January 2014, the Company was preparing to sell its final stake in Cairn India Limited. It was then that the Indian Income Tax Department (IITD) decided to launch a retrospective tax investigation into the company.
As a result, we received notification that we were restricted from selling our remaining ~10% shareholding in Cairn India Limited (CIL, since merged with Vedanta Limited). The IITD has subsequently sold the majority of this shareholding and received the proceeds and dividend payments.
The Company raised proceedings under the UK-India Bilateral Investment Treaty in 2015 following the events in 2014 which had a major detrimental impact on international shareholders, as well as the Company. The business had to sell assets, postpone major investments and make a substantial reduction to its workforce.
More than five years later on 22 December 2020, the international Tribunal made a unanimous award in favour of the Company. The Tribunal found that the Government of India’s actions beginning in 2014, by the previous administration, were in breach of its obligations under the UK-India Bilateral Investment Treaty. Addressing the jurisdiction of the arbitration, the tribunal ruled that the dispute was within the scope of the Treaty and other relevant legal parameters. It further ruled that the application to Cairn of the retrospective tax amendment introduced by the GoI was “grossly unfair” and in breach of the “Fair and Equitable Treatment" standard of the Treaty.” In a ruling which is final and binding on both parties, it awarded to the Company damages equal to the enforcement actions taken against it, being US$1.2 billion plus interest and costs. The total now payable and due is now more than US$1.7 billion as at April 2021.
The Tribunal panel stated in its award ruling: “The issue at stake is thus not a matter of domestic tax law; it is rather whether the fiscal measures taken by the State, valid or not under its own tax laws, violate international law.”
In August 2021, the Indian Parliament introduced the Taxation Laws (Amendment) Bill 2021, which has certain amendments to the retrospective taxation measures that were introduced by the Finance Act 2012.
Cairn is considering entering into statutory undertakings with the Government of India in respect of new legislation, which would enable the refund of retrospective taxes collected from Cairn in India by way of asset seizures since 2014. The final form of these statutory undertakings has yet to be published by the Government of India, but it is anticipated that the principal condition that they prescribe will be the withdrawal of Cairn’s rights under the international arbitration award.
The expected near-term resolution of the India tax dispute would result in a refund to Cairn by the Government of India of INR 79bn (approximately US$1.06bn). In accepting the terms of the new legislation in India, Cairn would be required to withdraw its international arbitration award claim, interest and costs and to end all legal enforcement actions in order to be eligible for the refund.