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Unilever, ABB skirt royalty rule with treaties

Tax treaties will help the Indian units of Unilever and Nestle SA avoid paying higher levies on royalties to their parents, frustrating Union finance minister P Chidambaram's efforts to bolster collections.

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Tax treaties will help the Indian units of Unilever and Nestle SA avoid paying higher levies on royalties to their parents, frustrating Union finance minister P Chidambaram’s efforts to bolster collections.

Rules in India’s double tax avoidance treaties with Switzerland will help Nestle and ABB cap tax on royalties at 10%, according to e-mail from the companies. Chidambaram in his budget last month proposed raising the levy to 25% from the next fiscal 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 Rs3,640 crore , according to Institutional Investor Advisory Services.

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.

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

Unilever’s local subsidiary will pay a 15% tax, spokesman R Ram said, citing an agreement between India and the UK.

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.

HUL on January 23 said it will double fees to the parent, prompting its biggest two-day drop in two years.

Maruti Suzuki India, which paid Rs1,800 crore as royalty to its parent Suzuki Motor Corp last fiscal, exceeding the company’s Rs1,680 crore profit in the period, will need to set aside 20% as tax as stipulated in an agreement between India and Japan.

“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% tax on dividends.

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