India and Finland have reached an agreement on the tax dispute with Nokia under Mutual Agreement Procedure (MAP) system. The resolution covers disputes pertaining to Nokia India as well as Nokia Corp. This involves payment of Rs 1,600 crore, a sum that was deposited with government by Nokia in March 2018.
This paves way for the sale of Nokia’s Chennai (Sriperumbudu) plant, which has been shuttered since November 2014. Software giant Microsoft had kept Sriperumbudur factory out of the deal when it acquired Nokia’s mobile device business in 2014 due to Income Tax notice and asset freeze imposed on the factory.
Nokia India was issued tax demand notice for Rs. 2,500 crore in 2013 by Income Tax Department, which was thereafter reduced to Rs. 1,600 crore over royalty payments made to its parent company in Finland since 2006. The IT Department also raised tax demand of Rs.10,000 crore tax on Nokia Corporation for same transaction, but was dropped under MAP agreement.
The tax claim was related to Nokia’s import of software from its head office in Finland. Nokia India had showed payments made for software as ‘purchase transactions’ and not ‘royalty payments’ and held that payment was made without keeping back any withholding tax.
The India-Finland Double Taxation Avoidance Agreement (DTAA) has set 10% rate for royalties, which was IT Department was demanding. In tandem, at Nokia India’s request, Finland had initiated MAP process under DTAA in 2013. Nokia India also had sought to initiate arbitration under Bilateral Investment Promotion and Protection Agreement (BIPPA) in 2014, but did not pursue it after Indian Government’s response through MAP avenue for solving cross-border tax dispute instead of arbitration.
Mutual Agreement Procedure (MAP) system
MAP is alternative dispute settlement mechanism that allows multinational companies (MNCs) to settle transfer pricing disputes with tax authorities and eliminate double taxation. The need for such arrangements was surfaced after many MNCs with operations in India had transfer pricing disputes with local tax authorities. MAP helps to increase comfort level of foreign investors over India’s tax laws. Moreover, speedy resolution of tax cases help in providing conducive atmosphere for investments and business to foreign companies in India. Under MAP, settling case with other government means closing all pending proceedings related to tax matter. It is increasingly seen as preferred mode for settling cross-border tax disputes.