Apple is lobbying for a change in the tax law in India as it potentially faces billions of dollars in taxes for new iPhone assembly equipment.
Some 25% of iPhones are now made in India, and the company is looking to push this percentage even higher, but there is a potential major barrier to further expansion …
iPhone assembly equipment
Assembling iPhones on a production line requires extremely expensive specialist equipment. In some cases, Apple’s manufacturing partners like Foxconn and Tata bear the cost of buying these machines. But when it comes to ramping up production volumes to new levels, the upfront costs can be too pricey for even these large contract manufacturers.
The approach Apple has taken in China is to pay for the machines itself. They are installed in the plants belonging to the company’s manufacturing partners, but Apple bears the cost and retains ownership.
This approach has worked well in China, but Apple is facing a potentially huge barrier to doing the same in India as it seeks to further expand production there.
Apple faces billions of dollars in taxes
In China, the fact that Apple owns the production equipment has no tax implications. The situation in India, however, is very different, as Reuters explains.
The Income Tax Act would consider such ownership by Apple as a so-called “business connection”, making the U.S. firm’s iPhone profits liable for Indian taxes, said a senior government official and two other industry sources […]
“If the activities of Apple constitute a business connection, then the global revenue may be used as a basis to compute the income attributable in India, leading to billions in tax exposure,” said Riaz Thingna, a partner at Grant Thornton Bharat LLP.
In other words, the profits created from the iPhones manufactured using this Apple-owned machinery would become taxable in India.
9to5Mac’s Take
The Indian government faces a dilemma here. On the one hand, it wants to encourage this kind of inward investment in its growing manufacturing sector. On the other, when foreign companies create value in the country, it wants to ensure it gets its slice of the tax pie.
Both parties ultimately need this arrangement to work, so a compromise acceptable to both sides seems the likely outcome.
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