Why IBM Finds Itself in an Indian Bleak House

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IBM in India: Kind of Blue

(Bangalore photo: Vinoo202)

IBM’s ongoing tussle with Indian authorities shows once again how complicated the tax climate is becoming for multinationals doing business in emerging markets. It also underscores the difficulties in dealing with Indias tangle of a legal system, which might charitably be described as Dickensian.

The computer company is disputing an $866 million tax assessment stemming from India’s claim that IBM hasn’t lived up to the terms of a software development agreement. That arrangement landed the US company the tax incentives in the first place.

Big Blue does have company, so to speak, in dealing with the tax man in India. Vodafone is engaged in a long-running battle with the country over a tax assessment and Nokia recently became ensnared in a nasty dispute over a tax bill that the telecom equipment maker puts at about $340 million. Authorities in New Delhi say the amount owed may be closer to $3.4 billionand have frozen the companys assets in India assets until the matter is resolved.

At the heart of these bust-ups: Tax incentives for development activities that are exported from technology parks in India to a multinationals headquarters abroad. The tax breaks include an exemption on any income generated from those parks.

In IBMs case, however, the Indian tax authorities rejected the companys claim for the benefits based on certain transfer pricing adjustments. Tax officials also contend IBM failed to maintain separate books and records backing its claim.In an email, Stuart Anolik of the Bethesda, Maryland, consulting firm CBIZ MHM wrote that the Indian tax authorities do not believe that IBM Indias profits are derived from qualifying ‘exports.’

Added Anolik: IBM will continue this battle in the courts.

That could take some time. H. David Rosenbloom, a former Treasury official and a professor and director of the International Tax Program at New York University, said in an interview that IBM has little choice but to fight on, because unlike the US and other countries, India lacks an informal means of settling such disputes outside the courts.

Noting that the Indian tax authorities have a great deal of independence and that the country’s crazy legal system allows both parties to appeal tax disputes to four levels of review, Rosenbloom says legal battles such as IBM’s can drag on for decades.

He added that the instincts of Indian authorities run to the judicial.

So why the arbitration-phobia? Rosenbloom believes that India suffers from hyperlexis (too much law) because authorities fear that an informal means of resolving disputes would provide too convenient a means foryepbribery.

Says the NYU professor: They’re deathly afraid of corruption.