Nokia uses MAP to navigate out of India tax mess

Written by Gireesh Chandra Prasad | Gireesh Chandra Prasad | New Delhi | Updated: May 8 2013, 06:40am hrs
Indian tax authorities aggressive stance on cross-border transactions of multinationals may have caused many of them to fret but some seem to have turned pliant. Mobile handset maker Nokia has invoked the India Finland Double Tax Avoidance Treaty for an out-of-the-court settlement of its R2,000-crore-plus tax dispute in India. The I-T department has claimed that tax is payable on payments made by the MNCs Indian arm to its Finnish parent for the use of the latters software in handsets made in India.

If New Delhi agrees to this under the mutual agreement procedure (MAP) of the tax treaty, Indian and Finnish tax officials will put their heads together to arrive at a consensus on how much of the groups profits should be attributed to each country and decide the tax liability accordingly.

We can confirm that the mutual agreement procedure under the India-Finland tax treaty has indeed been invoked, but given the fact that the tax case remains open, Im afraid we cannot comment on any details at this stage. Nokia looks forward to a prompt and just resolution to the matter, a spokesperson for Nokia told FE.

MAP, a closed-door meeting between tax authorities in which the entity involved in the dispute is not allowed to take part and is only informed of the progress, is a taxpayer-friendly scheme, since the outcome is binding on the department but not on the company. In case of an adverse outcome, the tax payer would still be able to approach courts and other quasi-judicial platforms under domestic law to get the grievance addressed, explained Amit Maheshwari, partner, Ashok Maheshwary & Associates. Although MAP is applicable only for the international transaction and for the year it is approved, it has a persuasive effect on the authorities in subsequent years, he said.

The I-T department considers Nokia in default of deducting tax on the payments made to its Finnish parent for use of software, which the authorities hold as royalty. The company last month got an interim stay order from the Delhi High Court against any coercive action from the department, that will be in force until early June. The court had also asked Nokia to appeal against the tax demand with the commissioner, income tax (appeals). However, the tax treaty allows tax payers to go for MAP irrespective of the remedies available under domestic law of treaty partner countries.

The rising number of cross-border tax disputes is likely to trigger more MAP filings in the country, considering that India has signed double tax avoidance treaties with about 90 countries. For the scheme to succeed, it is vital for the participating tax authorities to be ready for give and take. One of the concerns that probably weigh in the minds of tax officials engaging in MAP would be to take a position that is consistent with the position taken in other similar cases. MAPs usually take about two to three years to conclude. It could be invoked in disputes related to characterisation of income, existence of permanent establishment and adjustment of arms length price under transfer price regulations, among others.