Nokia Gets Burned on Indian Tax Appeal

Nokia Corp. (NYSE:NOK) has lost a tax appeal in India. The local tax commissioner rejected Nokia’s appeal against a charge that the company owes the Indian government the equivalent of $369 million in back taxes, triggering what’s likely to be a lengthy legal process.

The tax dispute is over payments made for software supplied by Nokia’s parent company for devices made in India. The Indian government has been cracking down on tax violations in an effort to raise tax revenue, which has fallen due to the country’s slumping economy. Vodafone Group PLC (NASDAQ:VOD) and Royal Dutch Shell (NYSE:RDSB) have also been targeted by the Indian government for unpaid taxes. Tax authorities believe that the payments made by Nokia count as taxable royalties.

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Indian authorities raided Nokia’s factory located in Chennai back in January. In March, Indian officials gave the company a bill for taxes that hadn’t been paid since 2006. Now that the appeal has been rejected, a tax officer will provide Nokia with notice and will likely demand payment within 30 days.

Nokia has said that its examining its options in regards to the case, including the possibility of appealing the claim again. Nokia claims that it cooperates fully with Indian tax authorities and believes that the charges being filed against it are unwarranted.

Nokia also faces another, unrelated Indian tax investigation. In this dispute, tax officials are claiming that Nokia wrongfully claimed an exemption on software exports and so owes an additional $38 million to the Indian government in back taxes. There is a 12 percent service tax on software developed and used in India, but no tax on software that’s exported out of the country, a loophole designed to make India more competitive in the global software market. Tax officials claim that Nokia didn’t pay taxes on software that the company both produced and sold in India.

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These legal hang-ups could hamper the Finnish Nokia’s efforts to make a comeback in the global handset market.

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