Indian Tax

There are a few hurdles left for Microsoft to clear they can acquire Nokia’s handset unit. Recently we’ve seen some complaints from Korean companies and interest groups over potential patent abuse that could result from the deal. One little tangle in Microsoft and Nokia’s plans revolves around a manufacturing plant in Chennai, India currently involved in a legal battle with the Indian government. The plant is to be transferred to Microsoft as part of the $7.3 billion USD deal to acquire Nokia’s phone business. However, that manufacturing plant may now be shut down and not transferred to Microsoft. 

On Friday, India’s Supreme Court ruled that Nokia must deposit $571 million into an escrow account before the Chennai factory can be transferred to Microsoft. This is an increase from the $339 million a lower court asked Nokia to set aside last month.

Nokia’s tax troubles in India started in January 2013 when Indian tax authorities raided the company’s offices and facilities in Chennai. Indian tax officials say that Nokia allegedly owed $545 million in back taxes. Those back taxes are allegedly on income from downloads on phones made in India. Nokia didn’t want to pay those taxes because of a bilateral tax treaty between India and Finland.

Nokia was previously cleared to transfer the factory to Microsoft. At the time, the Dehli High Court ruled that Nokia could transfer the Chennai factory to Microsoft if they set aside $339 million into an escrow account for those back taxes. Nokia agreed, but continued to challenge the ruling.

That challenge came to an end on Friday when the Supreme Court ruled that Nokia would need to put $571 into an escrow account before the factory could be transferred to Microsoft. Now, Nokia is reconsidering its options surrounding the manufacturing plant.

The Chennai plant employs over 8,000 people and is by far one of Nokia’s largest factories for making phones. Those 8,000 people may be out of a job when the dust settles from this Indian tax debacle. The Indian tax courts are currently filled with companies like IBM, Vodafone, BMW and Royal Dutch Shell fighting similar back tax claims.

A few possible outcomes now exist for Nokia. If they don’t transfer the plant to Microsoft, Nokia could run the plant as a contractor on behalf of Microsoft. Though Nokia’s laywers say it would be temporary and wouldn’t last long. Nokia could also shut the plant down. Of course, that means 8,000 people in Chennai are now jobless, Microsoft is left without a major phone manufacturing site and Nokia ends up with less money from the deal.

Microsoft and Nokia are working hard to close the deal within the month. However, this ruling from the Indian Supreme Court might be a minor setback.

Source: Reuters Via: Quartz