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By Siri Bulusu
Nokia will pay the Indian government $241.4 million to settle an ongoing tax dispute out of court—a move practitioners are calling a “positive signal” from a government known for aggressively pursuing tax demands.
India and Finland resolved the telephone manufacturing giant’s five-year tax dispute over an original $602.3 million tax demand through a mutual agreement procedure, a dispute resolution provision offered in the countries’ tax treaty. As a result, the Indian tax authority will dismiss the original demand.
The one-time settlement provided under the India-Finland double tax avoidance agreement is a marked departure from the Indian tax authority’s pattern of drawing foreign multinationals like Alphabet Inc.'s Google and Vodafone Group Plc into years-long litigation over large tax demands, practitioners told Bloomberg Tax.
“This process under the mutual agreement procedure bore fruit and may be a good sign that Indian revenue authorities may be open to settle such involved tax disputes,” Vispi Patel, head of Vispi T. Patel & Associates, said in an April 24 email.
Nokia Corp. declined to comment in an April 24 email. In India, Nokia’s networks serve 418 million subscribers, according to its annual report.
Mutual agreement procedures (MAP) are a dispute resolution method provided in double taxation treaties, and are becoming an increasingly attractive tool to resolve tax disputes, according to practitioners. MAP agreements don’t set precedents for companies facing similar tax issues because the negotiations are specific to each case.
“The competent authorities on both sides need to consent to the agreement under MAP, and a lot of times both sides only agree to disagree—so the fact that India and Finland reached this decision is a very welcome signal to the investing community,” Rakesh Dharawat, a partner at Dhruva Advisors LLP, said April 24.
Nokia had to make a “business call” and chose between continuing litigation or undergoing MAP negotiations to unfreeze assets that had been seized by the government as part of the dispute, practitioners said.
“At the end of the day, Nokia had a defensible case and that’s why there was litigation in the first place, but sometimes a company has to take the view that it is not worth going through the litigation channel when there are such high stakes and company attention being diverted,” Mukesh Butani, managing partner of BMR legal, said April 24.
The original tax demand arose from the application of section 9(1)(vi) of India’s tax code that applies the definition of royalty payments to include payments made by residents to a non-resident company.
From 2006-12, Nokia India Pvt. Ltd. made payments for software to its Finland-based parent company Nokia Corporation under the heading “purchase transactions” and paid taxes as though the transaction was regular business income, according to court documents. Tax authorities, however, saidthat the transaction counted as royalties and held that a 10 percent tax should have been withheld by Nokia India before making payments to its parent company.
Nokia India became a “taxpayer in default” in 2013 and tax authorities froze its Indian assets, properties and assets in an effort to protect its revenue. As a result of the seizure, Nokia had to stall the 2014 sale of its phone manufacturing plant to Microsoft Corp., according to a report by the Economic Times.
Nokia initiated the Mutual Agreement Procedure under the India-Finland Tax Treaty and recently agreed to tax payments made to headquarters as “royalty” at the rate of 10 percent.
Butani said the government seizure of Nokia’s assets was “very bad press” for India, which had become known for aggressive tax laws by that time.
“The case revealed the power of Indian tax authorities on the world stage—the plant was left unutilized, workers were laid off and Nokia was blocked from putting its Chennai factory on the block for a global deal,” Butani said.
While the MAP resolution was ultimately successful for both parties looking to exit toxic litigation, other companies will have to make the decision to pursue such a resolution independent of this example, Butani said.
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