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By Siri Bulusu
Nokia will release 100 million euros ($121.8 million) in frozen Indian assets in its second quarter, due to settlement of a long-standing tax dispute that cost the Finnish telecom giant 202 million euros to resolve. In an April 26 first-quarter earnings call, Nokia’s chief financial officer Kristian Pullola told investors that the Indian and Finnish governments “reached a resolution in Q1, which Nokia accepted, resulting in a one-time tax expense of approximately 200 million euros.”
The one-time settlement was reached during the first quarter of 2018 through a mutual agreement procedure (MAP) between Indian and Finnish tax authorities—a dispute resolution provision offered in the double tax treaty between the two countries. The resolution, he added, “also resulted in a cash outflow of approximately 100 million euros in Q1 as we had already paid 100 million euros earlier. We are pleased to put this tax dispute behind us.”
The sale of Nokia’s mobile phone manufacturing plant in Chennai to Microsoft Corp. was hanging on the resolution of the five-year tax dispute, said analysts, since Indian tax authorities seized the company’s Indian assets prior to the sale in an effort to protect its original tax demand of 39.9 billion rupees ($598.1 million).
“Moving forward, Nokia will likely sell their Chennai plant now that it has been released—this development is critical to the plant’s future,” Sebastien Sztabowicz, equity analyst at Kepler Cheuvreux, told Bloomberg Tax April 26.
The original dispute related to Nokia’s legacy devices and services business, and centered around the applicability of a withholding tax upon payments made by Nokia India Pvt. Ltd. to Nokia Corp. for the supply of software and hardware.
From 2006 to 2012, Nokia India made payments for software to Finland-based Nokia Corporation under the heading “purchase transactions” and paid taxes as though the transaction was regular business income, according to court documents. Tax authorities held that the transaction counted as a “royalty” payment for which Nokia India should have withheld a 10 percent tax before making payments to its parent company.
Authorities claimed Nokia India was a “taxpayer in default” in 2013, froze its Indian assets and properties and slapped the company with an original tax bill worth 39.9 billion rupees.
Nokia opted to resolve the matter through the MAP procedure available through the tax treaty with India, said practitioners—ultimately making the business decision to resolve the dispute quickly rather than continue bearing the cost of litigation.
“I think when companies can settle this kind of irritating situation in big markets its good news for everyone—now investors can focus on the future of the company instead of its history,” Hannu Rauhala, senior equity analyst at OP Financial Group, told Bloomberg Tax April 26.
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