NEW DELHI: Finland has invoked an alternate dispute resolution provision in its double taxation avoidance agreement with India against the Rs 2,000-crore demand slapped on handset maker Nokia, as it seeks to arrive at a negotiated settlement over the tax dispute.
The Finnish government has requested India to consider the case under the alternate dispute resolution mechanism called the Mutual Agreement Procedure (MAP) in the tax treaty, which provides for settling the case even as a parallel judicial process continues in India.
"They have filed an application. We are examining it and will take a decision in accordance with the provisions of our tax treaty with Finland," a finance ministry official told ET.
The government is not bound to accept the request. It had earlier rejected a request for an MAP to settle the multi-billion-dollar Vodafone tax dispute.
Nokia confirmed the development, saying it looked forward to a prompt and just resolution to the matter. "We can confirm that the mutual agreement procedure under the India-Finland tax treaty has indeed been invoked, but given the fact that the tax case remains open, I'm afraid we cannot comment on any details at this stage," said a company spokesperson.
The Income-Tax Department had issued a Rs 2,000-crore tax demand on Nokia on March 21 for not withholding tax on the payment made to its parent as royalty for the software used in its mobile phones since 2006. The demand includes both tax and penalty, but has for the moment been stayed by the Delhi High Court. The tax authorities have also suggested that an additional notice could be issued to the phone maker for violation of transfer pricing norms, though no specific penalty has been quantified yet.
The Nokia tax demand is one of the many high-profile disputes that threaten to sour relations between MNC companies and the government. Over the last several months, the tax authorities have raised the heat on multinationals and asked them to pay billions of dollars for alleged offences ranging from undervaluing shares sold to associate companies as in the case of Shell and Vodafone to excise tax evasion in the case of Cadbury. The MNCs are contesting these demands.
These disputes have ironically risen at a time the government is trying to woo foreign investors and address concerns about the stability and predictability of India's tax regimes. Vodafone's Rs 14,000-crore tax row, of course, remains the biggest. The UK-based telco had asked the government to begin conciliation proceedings to resolve the issue, but talks have not moved forward after the law ministry expressed reservations about the process.
The MAP provision that the Finnish government wants to trigger is a preferred route to settle cross-border taxes. Once the proceedings are initiated under MAP, it is possible for a taxpayer to obtain a stay on the tax demand provided it gives a bank guarantee.
Competent authorities of both the countries can negotiate a mutually acceptable settlement under this provision. India and the US had settled a number of cases in 2010 through the MAP process.