Unilever, Holcim Skirt Royalty Tax Burden With Treaties

Tax treaties will help the Indian units of Unilever and Nestle (NESN) SA avoid paying higher levies on royalties to their parents, frustrating Finance Minister Palaniappan Chidambaram’s efforts to bolster collections.

Rules in India’s double tax avoidance treaties with Switzerland will help Nestle (NEST) and ABB Ltd. (ABBN), the No. 1 maker of power transformers, cap tax on royalties at 10 percent, according to e-mail from the companies. Chidambaram in his budget last month proposed raising the levy to 25 percent from the year starting April 1 as he seeks to rein in the worst deficit among the largest emerging markets.

Royalty fees by local units of two dozen overseas companies more than doubled in the past four years to 36.4 billion rupees ($669 million), according to Institutional Investor Advisory Services. Higher tax on the payouts may have helped Chidambaram, who also asked top earners to pay more income tax, as he struggles to meet his budget-deficit goal of 4.8 percent of gross domestic product and avoid a credit rating downgrade.

The tax increase will have “no meaningful impact on the trend by multinationals to hike royalties from their Indian subsidiaries,” said Nick Paulson-Ellis, India country head for Espirito Santo Securities Ltd.

The biggest multinational companies operating in India are based in the U.S., Japan, Switzerland, France, Germany, the U.K., the Netherlands and Sweden, Paulson-Ellis said. All have double tax avoidance treaties with India, he said.

Investor Protests

Unilever (UNA)’s local subsidiary will pay a 15 percent tax, spokesman R. Ram said, citing an agreement between the South Asian nation and the U.K.

The payments have spurred protests from minority investors in India as profits are diverted overseas, according to Jitendra Nath Gupta, founder of proxy adviser Stakeholders Empowerment Services.

Hindustan Unilever Ltd. (HUVR) on Jan. 23 said it will double fees to the parent, prompting its biggest two-day drop in two years. The stock had its recommendations cut by at least 11 brokerages following the announcement. Chief Financial Officer Sridhar Ramamurthy said the higher fees were “designed to help us grow competitively.”

Maruti Suzuki India Ltd. (MSIL), which paid 18 billion rupees as royalty to its parent Suzuki Motor Corp. (7269) in the year ended March 31, exceeding the company’s 16.8 billion rupee profit in the period, will need to set aside 20 percent as tax as stipulated in an agreement between India and Japan.

‘Camouflaged Dividends’

“Royalties are camouflaged dividends that go only” to the parent, said Gupta. “By taxing it lower than dividends which are shared by all, there is a double incentive to pay more in royalties.” India levies a 16.2 percent tax on dividends.

Maruti’s shares, which have gained 0.2 percent in the past year, rose 0.1 percent to 1,364.95 rupees at 10:01 a.m. in Mumbai. Nestle India Ltd. fell 0.3 percent to 4,667.05 rupees, while Hindustan Unilever added 1.4 percent to 460.05 rupees.

Chidambaram in his budget speech on Feb. 28 said royalties paid for use of brand name and technical service fees would attract a 25 percent tax. The slowest pace of economic growth in a decade led the minister to raise some taxes. He also asked people earning more than 10 million rupees a year to pay more taxes.

“There was some hope that” Chidambaram’s proposal would prompt companies to consider higher dividends, said Amit Tandon, managing director of Institutional Investor Advisory Services. “But the fine print was different.”

‘Multinationals’ Behavior’

In an interview on March 15, Chidambaram, while discussing transfer pricing, expressed concern about the eroding tax base as multinationals distributed their profits over several tax jurisdictions.

“There is a general, wider political thought on the behavior of multinationals in exploiting the system across various tax jurisdictions,” said Espirito’s Paulson-Ellis. “It is an issue for legislature in many countries.”

ABB’s Indian unit paid 200 percent of its profits as royalty for the year ended March 31, according to a Dec. 19 report by Espirito Santo, which found that the 25 biggest foreign-owned firms in India more than doubled their payments between 2008 and 2012.

Nestle paid 33 percent of its profit and 4.2 percent of its sales as royalty, according to the report.

Spokesmen at Swiss Holcim Ltd. (HOLN)’s units Ambuja Cements Ltd. (ACEM) and ACC Ltd. (ACC) didn’t respond to e-mail queries. Investors at both cement makers, 51 percent owned by Holcim, agreed to double royalty fees to 1 percent of sales on Feb. 19.

“Government over a period of time signed up a bunch of treaties to encourage investment in the country,” said Tandon. “In the process, it also created a few loopholes.”

To contact the reporter on this story: Bhuma Shrivastava in Mumbai at bshrivastav1@bloomberg.net

To contact the editor responsible for this story: David Merritt at dmerritt1@bloomberg.net

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