India, Finland settle Nokia tax dispute to pave way for sale of Chennai plant

The dispute between Finnish telecom firm Nokia and the Income Tax Department - one of the biggest involving a multinational company - has finally been settled. According to The Economic Times, India and Finland have reached an accord on the dispute under the Mutual Agreement Procedure (MAP), clearing the way for the sale of Nokia's Chennai plant, which has been shuttered since November 2014.

"Resolution has been reached... Nokia has agreed to make provisional tax payment," income tax department officials told the daily, adding that the resolution covers disputes pertaining to Nokia India as well as Nokia Corp. In a similar vein, a Nokia spokesperson yesterday said "We are hopeful on resolving the issue relatively soon in cooperation with the authorities in India". The company reportedly made a tax payment of Rs 1,600 crore to the government in March.
What was the case again?

In March 2013, the Income Tax Department had issued a tax demand of around Rs 2,500 crore on Nokia India over royalty payments made to its parent company in Finland since 2006. The claim related to Nokia's import of software from its head office in Finland. Nokia India showed the payments made for the software as 'purchase transactions', not 'royalty payments', and hence said that the payment was made without keeping back any withholding tax but the government begged to differ.

The India-Finland Double Taxation Avoidance Agreement set a 10 per cent rate for royalties, which was what the taxman was demanding. The report added that the tax claim was Rs 1,600 crore after rectification.

In tandem, at Nokia India's request, Finland initiated the MAP process under the DTAA in 2013. According to the daily, the company had also sought to initiate arbitration under the Bilateral Investment Promotion and Protection Agreement in 2014, but did not pursue it after the Indian government's response through the MAP avenue - the all-new government under Narendra Modi had been advocating the use of MAP for solving cross-border tax disputes instead of arbitration. Under MAP, settling a case with the other government essentially means closing all pending proceedings related to a tax matter. The discussions on MAP eventually bore fruit and the deal was sealed over the past two-three months.

The report added that a Rs 10,000 crore tax raised on Nokia Corp. for the same transaction on the grounds that it had a permanent establishment in the country was not found sustainable and got dropped.
What about the shuttered factory?

With the curtains coming down on the tax dispute, things are also looking up for the shuttered Chennai factory, located in Sriperumbudur. Nokia chief executive Rajeev Suri hinted as much to the daily last week, saying, "We will be able to find a solution to the tax situation between the two governments - Finland and India - and then that will open the way of seeing if we can we can do something on the factory as well."

When software giant Microsoft acquired Nokia's mobile devices business for about $7.5 billion in 2014, it kept the Sriperumbudur factory out of this deal due to the asset freeze imposed by the Income Tax Department. In March 2014, the Tamil Nadu government also served a Rs 2,400 crore sales tax bill to Nokia, saying the firm sold products from the Chennai plant in the domestic market instead of shipping them overseas. Nokia eventually suspended all operations from November 1, 2014.

At its peak, the factory was the world's largest mobile phone plant, employing 6,600 people (permanent employees) and producing more than 15 million phones a month. A report of Indian Cellular Association claimed that mobile phone export from India crashed by 70 per cent to Rs 2,450 crore in 2014, down from Rs 11,850 crore in 2013, due to production getting affected at this plant. The uncertainty had eventually led Nokia to shift production to a new factory in Vietnam.

But things might change soon. According to Suri, the company hopes to make some announcements during its first-quarter results, due to be disclosed on April 26. The daily adds that Foxconn Technology, which bought some machinery from this plant a few months ago after Nokia managed to get permission from the authorities to work around the asset freeze, is now in advanced stage of talks with the Tamil Nadu government to resolve the tax issue in order to take over the plant.

With PTI inputs