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Royal Dutch Shell Saves $2.5 billion In Transfer-Pricing Case

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Bidness Etc discusses the ruling by an Indian court in a transfer-pricing case against Shell and its impact on future foreign investment in the country

Published: November 19, 2014 at 12:26 pm EST

By: Micheal Kaufman

The Bombay High Court has ruled in favor of Royal Dutch Shell plc (NYSE:RDS.A) in a high-tax profile case, which could pose a hurdle to the Indian government’s plans on bringing in foreign investment and much-needed revenue.

The ruling was announced on Tuesday, after Indian authorities claimed tax money paid to transfer shares of Shell. The court has not released a written judgment yet.

The judgment can negatively impact India’s image, which might cause leading foreign companies to hesitate to invest in India. Indian Prime Minister Narendra Modi can intervene and reverse the ruling.

The Indian government can request the tax authorities to review the case.

In order to allegedly evade more than $2.5 billion in taxes, which should have been considered as income, Indian tax officials believe that Shell’s shares were underpriced when transferred from its Indian subsidiary to the parent company. However, Shell’s lawyers and executives have denied this, stating that shares were valued at the right price.

According to the Shell’s spokesperson, the foreign parent’s equity infusion into its subsidiary is not liable to be taxed. The spokesperson said that the court’s ruling was unbiased and that it would help strengthen the government’s initiatives to progress toward a better investment climate.

The judgment has specified that transfer-pricing laws cannot be imposed on shares issued to a foreign parent. It will be an example for similar cases, which are pending in the court.

Many foreign companies have complained that Indian tax officials seem to target major foreign investors in the country. These include Vodafone Group Plc (ADR) (NASDAQ:VOD), Nokia Corporation (ADR) (NYSE:NOK), Mondelez International Inc (NASDAQ:MDLZ), HSBC Holdings plc (ADR) (NYSE:HSBC), General Electric Company (NYSE:GE), AT&T Inc (NYSE:T) which, in recent years, have invested heavily in India. They remain disappointed at huge taxes being imposed on them.

Vodafone, which has the second largest number of subscribers in India, went to court resolve a multibillion-dollar tax issue with Indian authorities. It was charged $2 billion for purchasing a stake in an Indian phone company in 2007. The court had ruled in favor of Vodafone, but the Indian Parliament introduced a retroactive law to tax the company. In another transfer-pricing case, Vodafone managed to win the $580 million case.

Similarly, Nokia was convicted of evading billions of dollars in taxes by misquoting exemptions for exporting software. The Indian court froze its assets in the country, which prevented its Chennai factory from becoming a part of the merger with Microsoft Corporation (NASDAQ:MSFT).

With a confused notion over the tax laws, India ranks low in the ease of doing business index, which is why it was ranked 142 out of 189 by the World Bank.

Indian Prime Minister Narendera Modi has decided to diminish what he calls tax-terrorism as he works to bring investment to Asia’s third-largest economy, although he must improve the tax environment first.

According to analysts, tax authorities will most likely work to provide better environment after lost cases against Vodafone and Shell.

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