Nokia-Microsoft deal through, but tax tangle gets worse
Given how long cases take to get cleared, both Microsoft and Nokia must be breathing a sigh of relief that the latter’s ongoing tax dispute with Indian tax authorities has not been allowed to get in the way of their $7.3 billion deal. Apart from what it would have meant for both firms, it would also have hit India’s image as an investment destination if an integral part of a global deal unravelled because of a dispute with the taxman on a tax demand that Nokia feels is so unjustified, the government of its home country Finland is actually seeking to resolve with the Indian tax authorities. What the Delhi High Court has done is to rule that, while both the taxman and Nokia seem to have their own set of arguments, the important issue is that, were Nokia’s India factory not transferred to Microsoft, it will no longer be able to function unless Microsoft decides to use it for contract manufacturing—in which case, 8,000 direct jobs will be lost along with another 25,000 in units working as ancillaries for Nokia. Theoretically, the factory and its land can be sold, but this will fetch a fraction of the value that is being got while transferring the facility as part of the larger Nokia-Microsoft global deal. Which is why, the court asked if Nokia Finland was willing to give a guarantee that, were the case to finally go against Nokia India, it would pay the necessary taxes. The court judgment, in fact, even helps the taxman since, were the Chennai factory not to be transferred to Microsoft, its value would soon diminish, leaving the taxman few assets to attach even if he won the case.
Now that the deal is through, it is important to resolve the tax tangle at the earliest. While the court has not commented on the tax demands since the case is being heard in another forum, it has pointed out “the tentative/anticipated demand … is significantly less and different from demand now highlighted to us”. That apart, while there are two tax demands, both are related to each other. There is a tax demand on Nokia India not making tax deductions at source (TDS) on payments made to Nokia Finland and, since this was not done, the other case relates to not allowing these payments to be deducted as expenses—in that sense, were one case to be resolved (or the tax paid), the other will automatically disappear. It doesn’t help that, apart from the issue of whether TDS had to be made, even the amounts involved are disputed by both parties. Given how long the case will take by the time the Supreme Court hears it, it is best if the tax authorities of both countries settle the matter bilaterally.