Almost £175 million was wiped off the value of Cairn Energy yesterday after it emerged that it must pay more than £1 billion in unpaid tax in India.
The demand, which the company is contesting, appears to dash market hopes that it might soon be able to sell its remaining 10 per cent stake in Cairn India, worth $700 million at present, and return the cash to investors.
The Scottish oil exploration group said that it had received a draft assessment from India’s tax authorities for $1.6 billion, plus interest and penalties, relating to capital gains in the 2006-07 tax year.
It said that the demand stemmed from new rules introduced in 2012 giving authorities retrospective power to tax transactions such as the corporate restructuring that enabled it to spin off Cairn India via an IPO.
The disclosure, which sent shares in Cairn tumbling by 30p to 153¼p, a fall of 16.4 per cent, was a surprise, as the company previously had reported encouraging discussions with the government over a resolution.
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Cairn insisted that, throughout its time in India, it had been been “fully compliant with the tax legislation in force and paid all applicable taxes”.
The company said that it had filed a dispute notice under the UK-India Investment Treaty. It said that this required the Indian government to enter negotiations with Cairn, adding that if a satisfactory resolution could not be reached the matter would have to adjudicated by an international arbitration panel.
Although the dispute process could take several months, Cairn said that it remained confident of its legal position and had no plans to make any accounting provision over the tax demand.
Simon Thomson, the chief executive of Cairn, said that the development was “very disappointing”, given the company’s engagement with Indian officials over the past 14 months.
He said that, since the Indian general election last spring, senior ministers had “consistently commented on the negative impact the issue of retrospective taxation has had on international reputation and investor sentiment towards India”.