- India's Finance Ministry wants Vodafone, as the buyer, to pay the capital gains tax for Hutchinson Whampoa, the seller, after Vodafone bought out Essar via the Mauritius legal entity.
- Royal Dutch Shell used a unit in the Netherlands to invest into Shell India via a share purchase of Share India. The India Finance Ministry is claiming Shell should have paid a higher price (18x) for those shares, and thus higher taxes on the share purchase.
India Taking Transfer Pricing Scrutiny to a New Level
India is right to scrutinize MNCs and their transfer pricing. India audits companies with back offices in India to ensure the parent companies and other subsidiaries outside India are paying their Indian subsidiaries at arm's length, with a rate equivalent to what they would pay a third party for similar services. Parent companies and their subsidiaries pay subsidiaries on a cost-plus basis to guarantee the subsidiary a certain profit over the cost of the labor and parts that go into the subsidiary's business. India is trying to take transfer pricing to a new level:
- India wants to switch to a system where MNCs assign a portion of their total global profits to their Indian subsidiaries. India obviously wants more tax revenue, but MNCs have options and will invest elsewhere.
- Indian tax authorities claim when a MNC run expensive marketing campaigns in India, they are transferring intangible value to the brand world-wide and the Indian subsidiaries should be taxed for that. LG Electronics has been fighting such a case for years. A Delhi tax tribunal upheld the tax authority's view last month.
Source: "India to Foreign Firms: Pay More Taxes", The Wall Street Journal, February 25, 2013.
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