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NEW DELHIIndia's tax authorities are seeking billions of dollars from some of the world's biggest multinational companies, saying that they haven't properly valued transactions with their Indian subsidiaries.
The move threatens to sour foreign companies on India when it badly needs investment and is creating friction between tax authorities in India and the U.S.
In the past few weeks, oil company Royal Dutch Shell and U.K.-based cellular-phone operator Vodafone Group have received notices saying that they owe higher taxes than they have paid because they transferred shares between their Indian subsidiaries and other overseas units at too low a price, the companies say. Multinational companies frequently buy shares of overseas units as a way to inject cash into the overseas units.
U.S. companies including Gap Inc. Microsoft Corp and General Electric Co. have had similar disputes with Indian tax authorities over services that companies' Indian units provide to the parent. Such services might include operating call centers, providing research or purchasing raw materials like textiles.
The tensions reflect growing debate over how multinational companies should report their income through subsidiaries around the world. Emerging economies such as India want to grab a larger slice of such income, while the U.S. and other countries where the multinationals are based want to keep profitsand taxesat home.
In Shell's case, Indian authorities say that when a Netherlands unit of the oil company pumped money into Shell's India arm, it should have paid 183 rupees ($3.37) a share, instead of 10 rupees. As a result, Shell could face additional tax liability of around $1 billion, according to a consultant who is advising Shell on the matter. Shell says it valued the contributions of its India arm properly and doesn't owe the higher sum.
"Taxing the money received by Shell India is in effect a tax on foreign direct investment, which is contrary not only to law, but also to the spirit" of recent efforts to drum up investment, Yasmine Hilton, Shell's chairman in India, said in a statement.
Vodafone, meanwhile, says that Indian authorities said its India subsidiary underpriced shares issued to a Mauritius-based Vodafone unit by about 13 billion rupees, or roughly $240 million. Vodafone says it is challenging the order.
A spokesman for the Indian finance ministry says tax authorities pursue cases only against "some dark sheep who don't pay their taxes on time or hide their true income." A spokeswoman for the Indian tax department declined to comment.
Gap declined to comment, and representatives for Microsoft and GE didn't respond to requests for comment.
Disputes over "transfer pricing," as the practice is known, have been going on for years and often are resolved through negotiations by tax representatives of the countries involved.
But talks between the U.S. and India have gotten especially contentious lately, with the U.S. saying India is making increasingly unreasonable tax demands, a person familiar with the negotiations says. The U.S. has an unusually high backlog of about 140 transfer-pricing cases with India, the person says.
Michael Danilack, a deputy commissioner at the U.S. Internal Revenue Service who handles international tax negotiations, at a recent conference on international tax policy criticized India's process. "There doesn't seem to be very much rational thought put into the examinations that are currently going on in the field," he said, according to a tax blog maintained by law firm Fox Rothschild LLP.
A U.S. government official declined to comment on Mr. Danilack's remarks but said: "The U.S. believes that a predictable and transparent tax policy is always integral to developing a strong investment climate and attracting foreign investment."
The disputes come as India is working to overcome a reputation for having an uncertain tax regime. The government recently adjusted proposed tax rules to address some concerns of foreign investors over tax liabilities for standard investments and mergers in India. India also is negotiating with Vodafone to settle the government's $2 billion tax claim relating to the company's 2007 purchase of a majority stake in an Indian telecommunications companya separate issue from the transfer-pricing dispute.
Indian Finance Minister P. Chidambaram in the past few months has been trying to assuage investors and companies who expressed concern about Indian tax policies as he has sought to drum up foreign investment.
The disputes over transfer pricing could jeopardize the progress he has made. India meanwhile is under pressure to raise revenue. The government has pledged to cut the nation's budget deficit to 3% of gross domestic product by 2017 from 5.9% in the fiscal year through last March.
India scrutinizes multinational companies for a range of transactions. It audits banks and other companies with captive back offices in India to make sure the parents are paying their Indian subsidiaries an arm's length rate, the equivalent of what a third party would pay for such services.
Parent companies now pay subsidiaries on a so-called cost-plus basis, guaranteeing the subsidiary a certain profit over the cost of the labor and parts that go into, say, answering customer-service phone calls. India wants to switch to a system in which multinationals give a slice of their overall global profits to their Indian subsidiaries. That would be more lucrative for India, but the U.S. has balked, the person familiar with the discussions says.
In another example, Indian tax authorities say that when multinational consumer-electronics run expensive advertising campaigns in India, they are transferring intangible value to the brand world-wide and that the Indian subsidiaries should be taxed for that. LG Electronics Inc has been fighting such a case for years. A Delhi tax tribunal upheld the tax authority's view last month. An LG spokeswoman in India declined to comment.
Corporate tax lawyers say that India's scrutiny of share transfers is unprecedented for the country and unusual compared with other countries.
India to Foreign Firms: Pay More Taxes - WSJ.com
The move threatens to sour foreign companies on India when it badly needs investment and is creating friction between tax authorities in India and the U.S.
In the past few weeks, oil company Royal Dutch Shell and U.K.-based cellular-phone operator Vodafone Group have received notices saying that they owe higher taxes than they have paid because they transferred shares between their Indian subsidiaries and other overseas units at too low a price, the companies say. Multinational companies frequently buy shares of overseas units as a way to inject cash into the overseas units.
U.S. companies including Gap Inc. Microsoft Corp and General Electric Co. have had similar disputes with Indian tax authorities over services that companies' Indian units provide to the parent. Such services might include operating call centers, providing research or purchasing raw materials like textiles.
The tensions reflect growing debate over how multinational companies should report their income through subsidiaries around the world. Emerging economies such as India want to grab a larger slice of such income, while the U.S. and other countries where the multinationals are based want to keep profitsand taxesat home.
In Shell's case, Indian authorities say that when a Netherlands unit of the oil company pumped money into Shell's India arm, it should have paid 183 rupees ($3.37) a share, instead of 10 rupees. As a result, Shell could face additional tax liability of around $1 billion, according to a consultant who is advising Shell on the matter. Shell says it valued the contributions of its India arm properly and doesn't owe the higher sum.
"Taxing the money received by Shell India is in effect a tax on foreign direct investment, which is contrary not only to law, but also to the spirit" of recent efforts to drum up investment, Yasmine Hilton, Shell's chairman in India, said in a statement.
Vodafone, meanwhile, says that Indian authorities said its India subsidiary underpriced shares issued to a Mauritius-based Vodafone unit by about 13 billion rupees, or roughly $240 million. Vodafone says it is challenging the order.
A spokesman for the Indian finance ministry says tax authorities pursue cases only against "some dark sheep who don't pay their taxes on time or hide their true income." A spokeswoman for the Indian tax department declined to comment.
Gap declined to comment, and representatives for Microsoft and GE didn't respond to requests for comment.
Disputes over "transfer pricing," as the practice is known, have been going on for years and often are resolved through negotiations by tax representatives of the countries involved.
But talks between the U.S. and India have gotten especially contentious lately, with the U.S. saying India is making increasingly unreasonable tax demands, a person familiar with the negotiations says. The U.S. has an unusually high backlog of about 140 transfer-pricing cases with India, the person says.
Michael Danilack, a deputy commissioner at the U.S. Internal Revenue Service who handles international tax negotiations, at a recent conference on international tax policy criticized India's process. "There doesn't seem to be very much rational thought put into the examinations that are currently going on in the field," he said, according to a tax blog maintained by law firm Fox Rothschild LLP.
A U.S. government official declined to comment on Mr. Danilack's remarks but said: "The U.S. believes that a predictable and transparent tax policy is always integral to developing a strong investment climate and attracting foreign investment."
The disputes come as India is working to overcome a reputation for having an uncertain tax regime. The government recently adjusted proposed tax rules to address some concerns of foreign investors over tax liabilities for standard investments and mergers in India. India also is negotiating with Vodafone to settle the government's $2 billion tax claim relating to the company's 2007 purchase of a majority stake in an Indian telecommunications companya separate issue from the transfer-pricing dispute.
Indian Finance Minister P. Chidambaram in the past few months has been trying to assuage investors and companies who expressed concern about Indian tax policies as he has sought to drum up foreign investment.
The disputes over transfer pricing could jeopardize the progress he has made. India meanwhile is under pressure to raise revenue. The government has pledged to cut the nation's budget deficit to 3% of gross domestic product by 2017 from 5.9% in the fiscal year through last March.
India scrutinizes multinational companies for a range of transactions. It audits banks and other companies with captive back offices in India to make sure the parents are paying their Indian subsidiaries an arm's length rate, the equivalent of what a third party would pay for such services.
Parent companies now pay subsidiaries on a so-called cost-plus basis, guaranteeing the subsidiary a certain profit over the cost of the labor and parts that go into, say, answering customer-service phone calls. India wants to switch to a system in which multinationals give a slice of their overall global profits to their Indian subsidiaries. That would be more lucrative for India, but the U.S. has balked, the person familiar with the discussions says.
In another example, Indian tax authorities say that when multinational consumer-electronics run expensive advertising campaigns in India, they are transferring intangible value to the brand world-wide and that the Indian subsidiaries should be taxed for that. LG Electronics Inc has been fighting such a case for years. A Delhi tax tribunal upheld the tax authority's view last month. An LG spokeswoman in India declined to comment.
Corporate tax lawyers say that India's scrutiny of share transfers is unprecedented for the country and unusual compared with other countries.
India to Foreign Firms: Pay More Taxes - WSJ.com
