RPT-India cracks down on taxation of transfers within foreign firms

MUMBAI, Feb 18 (Reuters) - India is aggressively pursuing

tax claims against multinational firms operating in the country

as the government seeks to rein in its budget deficit, taking

particular aim at IT and back-office functions, tax officials

say.

It has targeted several multinational companies in recent

years for tax audits on transfer-pricing, but over the past 12

months has widened the scope of the investigations, tax

officials said.

Authorities are now checking deals involving more than three

dozen companies, focusing on transactions worth at least 250

million rupees ($4.7 million), officials said. Having just

issued claims for the financial year to March 2009, it has

shifted focus to 2009/2010.

Transfer pricing is the value at which companies trade

products, services or assets between units across borders, a

regular part of doing business for a multinational.

Revenue authorities in many countries including Britain,

France, Germany and the United States are increasingly

challenging efforts of companies to minimise tax liabilities by

moving taxable income from higher-taxing jurisdictions to

lower-tax ones.

In India's case, critics worry overly aggressive tax

authorities could undermine foreign investment although tax

officials say they have been working overtime as Finance

Minister P. Chidambaram looks to make up a revenue shortfall and

head off the threat of a credit rating downgrade.

"On some days we had to work through the night to meet the

deadline," said one official. "There are so many cases that are

coming to us but we don't have an adequate number of people."

At least 1,500 transfer pricing disputes were in litigation

in India as of February 2011, compared with fewer than six in

the United States and none in Taiwan or Singapore, an Ernst &

Young survey showed in August 2012. Still, Western campaigners

say BRIC countries - Brazil, Russia, India and China - are

tougher on corporate tax avoidance than developed countries.

One company in the cross hairs, Anglo-Dutch oil major Royal

Dutch Shell, said earlier this month it would challenge

a claim its local unit underpriced shares transferred to the

parent 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 to

parent Shell Gas BV at 10 rupees apiece in 2009 but that tax

authorities valued them at 183 rupees each.

Effectively, India is demanding the tax on the interest

Shell would have earned on the $2.8 billion, in the largest ever

claim in an Indian transfer pricing case, tax officials said.

South Korea's LG Electronics Inc, Singapore

property group Ascendas, French IT services firm Capgemini

and chocolate maker Cadbury, are among numerous global

companies involved in transfer pricing disputes in India,

documents at the tax department's appellate tribunal show. These

companies have challenged the tax department's orders.

In information technology and business process outsourcing

(BPO), the tax department believes many firms are taking

advantage of low costs in India to develop high-end, patented

services or products that are sent to overseas parent firms as

low-value routine work, the tax officials said.

These sectors are expected to account for more than half the

total claims in transfer pricing deals in the fiscal year

2008/09, one of the officials said, up from about one-third

earlier.

Outsourcing makes up more than $100 billion of India's

economy with companies such as Accenture, Bank of

America Merrill Lynch, and Microsoft Corp

employing thousands in functions such as customer service, risk

and fraud management and finance and accounting.

A spokeswoman for the National Association of Software and

Services Companies said the Indian outsourcing lobby group was

concerned tax authorities have been making "inconsistent and

very aggressive adjustments."

HOT TAX ISSUE

Because valuing an internal transaction is often a matter of

opinion and assumption of future growth, companies and tax

authorities can arrive at widely divergent views on their value.

"Some of their decisions on valuations are very arbitrary

and obviously may not be sustainable at higher appellate

levels," said Sanjay Tolia, partner for transfer pricing at

Price Waterhouse & Co in Mumbai.

In LG Electronics' case, tribunal documents show the

company's Indian unit was deemed to be promoting the LG brand

owned by its parent, which should have compensated the local

unit, thereby generating taxable income. Authorities claim the

excess expenditure amounted to a transfer pricing adjustment of

1.61 billion rupees.

Earlier this month, British-based mobile phone giant

Vodafone Group Plc said it had received a fresh transfer

pricing order in India over the issue of shares by a unit,

adding to its tax woes in the country. India's tax office says

the Vodafone unit under-priced shares issued to a

Mauritius-based group company by nearly 13 billion rupees ($244

million), ET NOW TV station reported recently. Vodafone said it

would challenge the order.

Vodafone is already fighting a transfer pricing case in the

Bombay High Court that involves a $1.6 billion disagreement, a

person with direct knowledge of the matter said. The company

declined to comment.

India is also trying to claim more than $2 billion in tax

stemming from Vodafone's 2007 acquisition of an Indian mobile

company from Hong Kong's Hutchison Whampoa Ltd.

Vodafone says share subscriptions are not covered by either

Indian or international rules on transfer pricing so the latest

order had "no basis in law".

Tax officials say that while shares are not taxable, the

department is increasingly clamping down on under-priced share

deals on the premise that it is losing out on taxing the

interest that the adjusted amount would have earned.

Still, consultants say the department's argument would not

stand the test of law.

Cadbury said it has challenged a ruling made against it for

2007-08 and that India's income tax tribunal had granted a stay

on the demand upon payment of less than 10 percent of the

amount.

The income tax department argues the local unit overpaid its

parent for brand royalty and service fees, thereby lowering its

profit in India and resulting in a lower tax obligation.

"It is not uncommon that the income tax department and a tax

payer have a difference of opinion on the interpretation of tax

laws," Cadbury said in a statement to Reuters.

Ascendas and Capgemini also declined to comment.

The average corporate tax rate in Asia in 2013 is 22.89

percent while in Europe it is 20.49 percent, compared with 32.45

percent in India, KPMG says.

Source: http://news.yahoo.com/rpt-india-cracks-down-taxation-transfers-within-foreign-032730880--sector.html

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