Column : From Foxconn to Nokia, and more

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SummaryIf part of Apple’s profits were to be considered transfer pricing between it and Foxconn, who’d want to manufacture in China?

The exact figures are a bit of a commercial secret, but Apple reportedly makes between $150 to $250 per iPad that Chinese assembler Foxconn makes for it. Foxconn, on the other hand, makes just a small fraction of this once you take out the cost of the goods it imports as part of the assembly process. A chart by Bloomberg puts Apple’s margins at 30% in 2012 as compared to Foxconn’s 1.5%—while Apple’s margins doubled since the iPhone debuted in June 2007, Bloomberg says, Foxconn’s nearly halved.

Now imagine what would happen, to Foxconn as well as to a host of other Chinese manufacturers, if the Chinese taxman were to slap a transfer pricing case on it and argue that a part of the profits Apple was making was nothing but underinvoicing of exports by Foxconn? Apple would think twice about getting manufacturing done by Foxconn, that’s what. Yet it appears that’s what the taxman in India is in the process of doing in the case of the mobile phones exported by Nokia from its assembly operations near Chennai—while a formal tax notice is yet to be served, those in the know say the tax demand is likely to be in the region of R13,000 crore.

The big difference between Foxconn and Nokia, of course, is that while the latter is a subsidiary of the parent Finnish firm, there are no ownership ties between Apple and Foxconn, but the principle is the same: how do you impute a fair value to the work done by a Foxconn or a Nokia India on an item that is exported? Should this just be done by, for instance, looking at rates charged by different local industries—in this case, assembly units for electronics—and using them as a benchmark for calculating an acceptable arms-length price?

Every case differs from the other, and transfer pricing is a hotly debated subject all over the world, but any tax demand has to be seen in the context of the impact this will have on India’s desire to grow as a manufacturing base. Given that, going by the budget documents, India gave R2,12,167 crore of excise duty concessions to the manufacturing sector in FY12, and another R51,292 crore of concessions to corporates in general, it’s a fair assumption that India does want to grow its manufacturing. Which is why, as FE has argued in the past, the fact that there has been

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