While casually browsing online magazines over the weekend, I came across an article that nearly made me spill my coffee on my keyboard. According to the Register, India has knocked on the door and asked Nokia Corp. (NYSE: NOK) for 30 billion rupees (nearly $545 million) for irregularities related to tax matters. Nokia says it is assisting authorities in this inquiry.
The Times of India reported that 20 income tax officials raided Nokia's Chennai facilities on the suspicion that the company has evaded taxes. Following this report, Nokia's stock value fell as much as 6.5 percent.
Nokia is not the only foreign company in India that has been hit hard by the tax man recently. Vodafone has been charged $3.5 billion by the Indian government after a six-year battle over its acquisition of Hutchison Whampoa's Indian business. Google received a $13.9 million fine, because Google India paid $21.9 million to Google Ireland for distribution fees without deducting taxes as required by a treaty between the two countries.
These fines indicate that businesses are taking advantage of tax loopholes. Governments are financially strapped. Competition is fierce, and the tax bills for some corporations are significant. Avoiding taxes may seem worthwhile for some companies. However, in Nokia's case, I think the true cost will be more than just money.
Despite Nokia's willingness to help out with this enquiry, the tax bill will have a significant impact on the company. I mentioned about a month ago that Nokia was selling its headquarters in Finland for Ä170 million ($220 million); that is less than half the amount being sought by the Indian authorities. Though the company is taking tough action to balance its checkbook, this tax must have left it with a very bitter taste.
Another important point to remember is that Nokia is relying on its success in emerging markets such as India to regain its strong global position. India has one of the fastest-growing mobile phone markets in the world, and it holds the key to Nokia's future growth. The company has been in India since 1995 and is one of the market leaders there. From a publicity point of view, this fine definitely will not help Nokia's reputation in India. Given the size of the tax penalty, I wonder if Nokia will consider making part of its Indian workforce redundant to compensate for losses in 2013. If that happens, it is likely to jeopardize the company's growth targets in the region.
Nokia must be wondering if there is a light at the end of this dark tunnel. In addition to the intense competition from rivals such as Apple and Samsung, this tax penalty could be a major blow for the Finnish company.