Shell to challenge Indian tax demand

The Indian subsidiary of Royal Dutch Shell has said it plans to challenge a tax order related to the underpricing of a share sale to its parent company in 2009.

Last week the Anglo-Dutch oil group received a notice from India's tax authorities claiming the company had miscalculated the amount it owed on the transaction, and proposing an adjustment of Rs155bn ($2.7bn).

In a statement, Yasmine Hilton, chairman of Shell in India, said: "Recent media reports on tax evasion are baseless and Shell India will challenge this order strongly, and is evaluating all options for redress."

The legal disagreement makes Shell the latest major international company to clash with India's tax authorities, whose complex procedures and combative enforcement policies often find it accused of creating barriers to foreign investment.

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The disagreement relates to a procedure known as transfer pricing, meaning the rules by which a multinational company operating in India accounts for transfers of funds between itself and its parent company.

In 2009 Shell issued shares to its own parent, Shell Gas BV, to finance investments in India, where the company operates a range of businesses from petrol stations to liquefied natural gas facilities.

The company says it used an independent company to value the equity, which it priced at Rs 10 per share for a total investment of $160m.

However, last week India's tax department notice ruled that the company ought to have valued the shares at Rs 183 per share, allowing it to reach the $2.7bn adjustment figure, which Shell disputes.

"Taxing the money received by Shell India is in effect a tax on foreign direct investment, which is contrary not only to law but also to the spirit of the recent global trip by [India's] finance minister to attract further FDI into India", Ms Hilton said.

Over recent weeks Indian finance minister Palaniappan Chidambaram has undertaken a tour of major global investment capitals, including London and Singapore, in an attempt to persuade international investors to renew their interest in Asia's third-largest economy.

In particular, potential tax changes relating to international deals proposed last year, in combination with a long-running ongoing tax $2.6bn dispute with UK telecoms group Vodafone, have dented India's reputation as a favourable investment destination.

"International investors face a significant number of challenges on cross-border tax issues in India, primarily related to the way they characterise certain types of income," said Ketan Dalal, head of tax and regulatory services at PwC India.

"This coupled with the long-winded litigation process over tax issues can make business very difficult for multinational corporations, and this in turn is becoming a major deterrent to foreign investment."