India: Apple circumvents "tax trap" on manufacturing
After corresponding lobbying efforts, Apple has succeeded: The company is allowed to buy machines for its suppliers in India – without a huge tax bill.
Apple flag on map with India: Important production location.
(Image: hyotographics / Shutterstock.com)
It has been known since last year that Apple could face a tax back payment of billions as part of its indirect manufacturing activities in India. The reason: The company operates very close to production, as it already does in China. This means that while it has iPhones & Co. manufactured by suppliers, it also provides the expensive and highly complex machines, at least in part. This has the advantage that they can be depreciated and used elsewhere, for example, if Apple were to "fall out" with a manufacturer. However, this could imply a "direct business relationship" for the Indian tax authorities, which would trigger corresponding payments. But that has now apparently been resolved: It became known over the weekend that India is changing its laws – after apparently intensive lobbying by Apple.
Five Years of Peace
According to a report by the Reuters news agency, foreign companies are now allowed to supply domestic manufacturers with machines for "in certain segments," which also includes the technology sector, for at least five years without tax risk. Apple is reportedly now manufacturing up to 25 percent of all iPhones in India, plus various other products.
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Apple has so far circumvented the problem by having manufacturers like Foxconn or Tata make advance payments – potentially for billions of euros. The Indian government's decision is now that, in order to strengthen the production of electronic products by contract manufacturers, a "business relationship" that triggers tax liability is not assumed even when purchasing machines. "We give you security," said Revenue Secretary Arvind Shrivastava at a press conference after the presentation of the state budget.
A "Deal-Breaker Risk"
The implementing regulation states: "All income arising from the provision of capital goods, equipment, or tools to a contract manufacturer that is a company registered in India shall be exempt from tax." This removes a "central deal-breaker risk," tax expert Shankey Agrawal told Reuters. He expects this to lead to a faster "scale-up" of production in the country and greater confidence in the Indian manufacturing market.
It remains unclear what will happen after the five years – the regulation is initially planned until the tax year 2030/2031. Since production changes rapidly, it is conceivable that the machines will have been moved out of the country again by then. India restricts the tax exemption to so-called Customs-Bonded Areas, factory premises that are officially "outside the Indian customs territory." These are used to facilitate exports – China has relied on such zones for years.
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