By Sumeet Chatterjee
MUMBAI, Feb 18 (Reuters) - India is aggressively pursuingtax claims against multinational firms operating in the countryas the government seeks to rein in its budget deficit, takingparticular aim at IT and back-office functions, tax officialssay.
It has targeted several multinational companies in recentyears for tax audits on transfer-pricing, but over the past 12months has widened the scope of the investigations, taxofficials said.
Authorities are now checking deals involving more than threedozen companies, focusing on transactions worth at least 250million rupees ($4.7 million), officials said. Having justissued claims for the financial year to March 2009, it hasshifted focus to 2009/2010.
Transfer pricing is the value at which companies tradeproducts, services or assets between units across borders, aregular part of doing business for a multinational.
Revenue authorities in many countries including Britain,France, Germany and the United States are increasinglychallenging efforts of companies to minimise tax liabilities bymoving taxable income from higher-taxing jurisdictions tolower-tax ones.
In India's case, critics worry overly aggressive taxauthorities could undermine foreign investment although taxofficials say they have been working overtime as FinanceMinister P. Chidambaram looks to make up a revenue shortfall andhead off the threat of a credit rating downgrade.
"On some days we had to work through the night to meet thedeadline," said one official. "There are so many cases that arecoming to us but we don't have an adequate number of people."
At least 1,500 transfer pricing disputes were in litigationin India as of February 2011, compared with fewer than six inthe United States and none in Taiwan or Singapore, an Ernst &Young survey showed in August 2012. Still, Western campaignerssay BRIC countries - Brazil, Russia, India and China - aretougher on corporate tax avoidance than developed countries.
One company in the cross hairs, Anglo-Dutch oil major RoyalDutch Shell, said earlier this month it would challengea claim its local unit underpriced shares transferred to theparent by $2.8 billion. Shell said the claim is based on an"incorrect interpretation" of tax rules and "bad in law".
Shell said its India unit issued 870 million shares toparent Shell Gas BV at 10 rupees apiece in 2009 but that taxauthorities valued them at 183 rupees each.
Effectively, India is demanding the tax on the interestShell would have earned on the $2.8 billion, in the largest everclaim in an Indian transfer pricing case, tax officials said.
South Korea's LG Electronics Inc, Singaporeproperty group Ascendas, French IT services firm Capgemini and chocolate maker Cadbury, are among numerous globalcompanies involved in transfer pricing disputes in India, documents at the tax department's appellate tribunal show. Thesecompanies have challenged the tax department's orders.
In information technology and business process outsourcing(BPO), the tax department believes many firms are takingadvantage of low costs in India to develop high-end, patentedservices or products that are sent to overseas parent firms aslow-value routine work, the tax officials said.
These sectors are expected to account for more than half thetotal claims in transfer pricing deals in the fiscal year2008/09, one of the officials said, up from about one-thirdearlier.
Outsourcing makes up more than $100 billion of India'seconomy with companies such as Accenture, Bank ofAmerica Merrill Lynch, and Microsoft Corp employing thousands in functions such as customer service, riskand fraud management and finance and accounting.
A spokeswoman for the National Association of Software andServices Companies said the Indian outsourcing lobby group wasconcerned tax authorities have been making "inconsistent andvery aggressive adjustments."
HOT TAX ISSUE
Because valuing an internal transaction is often a matter ofopinion and assumption of future growth, companies and taxauthorities can arrive at widely divergent views on their value.
"Some of their decisions on valuations are very arbitraryand obviously may not be sustainable at higher appellatelevels," said Sanjay Tolia, partner for transfer pricing atPrice Waterhouse & Co in Mumbai.
In LG Electronics' case, tribunal documents show thecompany's Indian unit was deemed to be promoting the LG brandowned by its parent, which should have compensated the localunit, thereby generating taxable income. Authorities claim theexcess expenditure amounted to a transfer pricing adjustment of1.61 billion rupees.
Earlier this month, British-based mobile phone giantVodafone Group Plc said it had received a fresh transferpricing order in India over the issue of shares by a unit,adding to its tax woes in the country. India's tax office saysthe Vodafone unit under-priced shares issued to aMauritius-based group company by nearly 13 billion rupees ($244million), ET NOW TV station reported recently. Vodafone said itwould challenge the order.
Vodafone is already fighting a transfer pricing case in theBombay High Court that involves a $1.6 billion disagreement, aperson with direct knowledge of the matter said. The companydeclined to comment.
India is also trying to claim more than $2 billion in taxstemming from Vodafone's 2007 acquisition of an Indian mobilecompany from Hong Kong's Hutchison Whampoa Ltd.
Vodafone says share subscriptions are not covered by eitherIndian or international rules on transfer pricing so the latestorder had "no basis in law".
Tax officials say that while shares are not taxable, thedepartment is increasingly clamping down on under-priced sharedeals on the premise that it is losing out on taxing theinterest that the adjusted amount would have earned.
Still, consultants say the department's argument would notstand the test of law.
Cadbury said it has challenged a ruling made against it for2007-08 and that India's income tax tribunal had granted a stayon the demand upon payment of less than 10 percent of theamount.
The income tax department argues the local unit overpaid itsparent for brand royalty and service fees, thereby lowering itsprofit in India and resulting in a lower tax obligation.
"It is not uncommon that the income tax department and a taxpayer have a difference of opinion on the interpretation of taxlaws," Cadbury said in a statement to Reuters.
Ascendas and Capgemini also declined to comment.
The average corporate tax rate in Asia in 2013 is 22.89percent while in Europe it is 20.49 percent, compared with 32.45percent in India, KPMG says.
Vodafone (VOD)
