When Shells India chairman says the taxmans latest demands on the company are in effect a tax on foreign direct investment, she is only voicing a sentiment that is increasingly being echoed in boardrooms of subsidiaries of MNCs located across the country. Going by the taxmans allegations, Shell India sold 8.7 crore shares to its parent Shell Gas BV at R10 apiece in 2009 while the actual value of the shares should have been Rs 183 each. Apart from the fact that Shell India says it complied with all the rules on valuing the shares, there are several apparent problems in the manner in which the taxman has applied the transfer pricing rules under which Shell India is now being asked to shell out back taxes and penalties. For one, even if you assume the shares were undervalued, there can be no evasion of capital gains tax till the shares were sold by Shell Gas BV; two, since issuing shares to a parent firm cannot possibly be seen as the main business of Shell India, its not clear how transfer pricing charges can even be levied. More important, even if you assume the taxman has a reasonable response to these issues, the structuring of the sale could have been done differently with no tax payable, even going by the taxmans calculations. Shell India, the taxman says, issued 8.7 crore shares at Rs 10 apiece and got R87 crore instead of the R1,592 crore it would have got had it issued them at the correct value. But since Shell India wanted just R87 crore from its Dutch parent, it could have issued 0.48 crore shares at R183 each and got the same R87 crore without attracting the taxmans ire. So, wheres the under-pricing
Since issuing of shares at par to global parents is the most common way by which local subsidiaries of MNCs bring in FDI, the Shell episode means almost all FDI transactions are in danger of being reinterpreted by the transfer pricing authorities. Even more disturbing, as FE has reported today, there has been a dramatic surge in transfer pricing cases being filed by the taxman, the latest of which is likely to be a R13,500 crore tax demand on Nokia for alleged under-pricing of its exportsa 150-page draft report on this has been filed by the local tax office to the Delhi headquarters. While such transfer pricing adjustment demands added up to R1,220 crore in FY06, this jumped to R44,532 crore in FY12in FY12, every other transaction of MNC subsidiaries led to a tax claim, up from one in four just 5 years ago.
If there has been such a jump in transfer pricing cases involving top MNCs, this is something the finance minister needs to look into, more so since most of the companies are alleging this is a major case of taxman overreach. It has the potential to drive away FDI and, going by the Shell chairman saying the company planned to challenge this order strongly and is evaluating all options for redress, its not even clear if the taxman will be able to lay his hands on the taxes in a hurry.