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Tax issues: How Apple, Google & Microsoft are grappling with Indian authorities
June, 25th 2013

It's a company that earned $30 billion in profits over three years, but effectively resided nowhere, filed no income tax return, and paid no tax to any government for five years.

Tax planners and tax consultants have a name for that $30 billion in profits and it's a term that sums up perfectly both the aim of those who set up companies this way, and the result achieved: "ocean income".

That company was Apple Operations International (AOI), based out of Ireland, a country which, because of its highly corporate-friendly tax laws, has turned into a magnet for the tech world's heavyweights. AOI, Ireland, incidentally, is the parent company for Apple India.

Apple India itself paid tax of Rs 156 crore to the Indian government in 2011-12, and of the three tech companies' Indian operations ET Magazine looked at for this story — Apple, Google and Microsoft — it was the one with the least amount of taxes under disputes; only minor amounts in relation to its overall profits for 2011-12 are disputed or demanded by tax authorities.

At the other extreme is Microsoft, which faces over Rs 2,000 crore in tax demands (both service and income tax) across its group companies which operate in India. And Google's India arm is locked in a dispute with the authorities over Rs 156 crore of tax demands in relation to its 2008 balance sheet.

In its financial statements, Google says that if the government assesses its income in later years in a similar fashion to the company's 2008 income, its tax 'impact' could rise to Rs 480 crore.

Apart from these three, a whole range of other tech companies in India have received tax notices, Nokia (about Rs 2,000 crore), and IBM India (Rs 1,090 crore) being the more prominent ones. But it's Apple, Google and Microsoft that have faced international scrutiny for their tax practices. Let's look at their run-ins with the Indian taxman.

Family Relationships

The subsidiaries of all three companies in India perform a whole range of functions — from research to customer support to actively marketing to local consumers. As Vikram Doshi, partner, tax and regulatory services at KPMG, points out, tech companies fall along a broad spectrum. At one extreme are those whose operations in India are solely focused on servicing group companies around the world.

"At the other extreme are companies focused on the potential of the domestic market and of targeting consumers here." In actual practice many companies do both and fall, therefore, somewhere in the middle.

And depending on the market they serve, whether foreign or domestic, and whether 'customers' are in-house — that is, other group companies — or people buying iPads, the tax implications vary. Take Microsoft for instance. It operates separate companies in India, each focused on a different line of business. Microsoft India handles marketing for the company's products, such as Office or Windows 8.

While it focuses on the domestic market, two sister companies (see Big Tech's India...) focus on servicing group companies. ET Magazine approached Microsoft with a list of questions but there was no response till the time of going to press. Given the range of activities of Microsoft's India operations, it's no surprise that the kind of tax notices and disputes it faces span a spectrum.
Take Microsoft India which provides marketing support services to the group's Singapore arm. It claimed that such services, aimed at drumming up customers in India, qualified as service exports and were therefore tax exempt. The taxman disagreed with the result that the company now faces a total of Rs 347 crore in service taxes due as of 2012. The dispute is in the courts. It's worth recognising an interesting fact about the ways the MNC tech companies in India earn their revenue.

Quite apart from support or R&D services to overseas group companies (important for both Google and Microsoft), all three companies have a substantial base of domestic customers with whom they do business. Except for Apple, both Google and Microsoft however, record almost all their income as coming from overseas group companies (well over 80%), irrespective of whether they serve other group companies or sell to Indian customers.
And while Apple books revenue in India from domestic customers, it buys over Rs 1,148 crore of goods from a fellow subsidiary in Ireland. Why would MNC tech companies in India structure their businesses in such a way as to treat even income from domestic consumers as income earned from overseas parents?

No Permanent Presence?

Google's tax issues with Indian authorities are about its Adwords advertising service under which a person can buy the right to have their ads displayed on Google when certain text is searched. A florist, for example, might buy the right to have his ads displayed whenever anyone searches for the words 'flowers' or 'birthday'.

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