Microsoft lucky to avoid Nokia’s India tax bill

December 12, 2013

By Andy Mukherjee

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Microsoft is lucky to dodge Nokia’s tax bill in India. On Dec. 12, the Delhi High Court allowed the Finnish group to transfer its Chennai factory to the U.S. software giant as part of its planned $7.4 billion sale of its mobile handset business. While the overall deal wasn’t in doubt, Microsoft avoids Nokia’s hard-to-assess tax liability. If only Vodafone had been so fortunate.

Indian authorities had seized Nokia’s local assets after slapping it with a $340 million demand for unpaid taxes dating back to 2007. If the company loses the legal battle, the exchequer’s final claim could be as much as ten times that amount, the tax office’s lawyer has told Reuters.

That may be bluster, but Microsoft didn’t want to find out. The dispute has been out in the open since March, giving lawyers for the Redmond company plenty of time to ensure that any liability stays with Nokia.

The Vodafone debacle explains why. Six years after the British mobile operator acquired its Indian business, it’s still fighting a $2 billion claim for tax the authorities say it should have withheld from the price paid to Hutchison Whampoa. When India’s highest court threw out the government’s claim, New Delhi changed the tax law with retrospective effect, spooking investors.

The tax regime in India has become very wobbly. Nokia says it’s been wrongly accused of evading taxes on payments made to its parent for supply of operating software. But the company is not alone. An Indian court recently told Verizon’s unit in Singapore that the fees it receives from corporate clients in India for providing them with dedicated Internet access is taxable as a royalty – and hence subject to the same 10 percent withholding tax that Nokia is being asked to pony up.

Making sure multinationals pay more taxes to their host countries is a sore point, even in rich nations. India’s bossy approach, though, could backfire. Too many countries are desperate for investment dollars. If New Delhi gets too heavy, the net effect will only be to increase India’s dependence on Microsoft founder Bill Gates’ charity.

(This article has been corrected to state that Microsoft is based in Redmond, not Seattle, in paragraph 3).

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