India: AB InBev’s Indian unit accused of avoiding tax

Indian authorities have accused global brewer SABMiller of avoiding paying tens of millions of dollars in taxes since 2011 by renaming royalty transactions as a management services, the Nikkei Asian Review reported on October 3.

The New Delhi-based Authority of Advance Rulings, a body that adjudicates cases of income tax liability involving nonresidents in India, said in a June 2018 order that the services provided by Netherlands-based SABMiller Management to its Indian units qualify as technical know-how and are thus taxable under Indian law.

The authority's ruling, seen by Nikkei Asian Review, upheld the report of the Indian income tax department, which said SABMiller had been avoiding tax on royalty payments for the last seven years.

While the total tax liability since 2011 has not been made public, a senior official involved in the case estimated it could be as much as $50 million. In addition, failing any successful appeal, SABMiller could face a fine of the same amount, bringing the total potential bill to about $100 million, he said. The Indian tax office refused to comment.

A spokesman for Anheuser-Busch InBev, which acquired SABMiller in 2016 for over $100 billion to create the world's largest beer company, also refused to comment.

A sharp jump in royalty outflows in the last decade has prompted Indian tax authorities to crackdown on companies seeking to avoid tax on this revenue. Google, in a similar case gave in after a six-year legal battle in October 2017. Its Indian subsidiary was ordered to pay back tax on accumulated income of about 150 million rupees (roughly $200 million). Royalties are the latest front in the government's long-running battle against avoidance by foreign companies. India has been embroiled in tax rows with Vodafone, Nokia, Shell and Cairn Energy, all of which face billions of dollars in back taxes over issues ranging from capital gains to transfer pricing.

In 2010, ActionAid, a nongovernmental organization that fights poverty, accused the SABMiller group of avoiding taxes in Indian and African nations - Ghana, Mozambique, Tanzania, South Africa and Zambia. The NGO estimated that SABMiller companies had deprived these governments of over $12.38 million in tax revenue.

SABMiller brewed and distributed beer in more than 70 countries producing popular brands like Fosters, Haywards 5000, Knockout and Nastro Azzurro in India.

According to documents included in the ruling, SABMiller Management in 2008 entered into a technology transfer agreement with its two Indian units, SKOL Breweries and SABMiller Breweries, which manufactured SABMiller-brand beers. Under the agreement, the Netherlands-based company paid tax on the royalties it earned from its Indian units.

In April 2010, however, the company replaced the technology transfer agreement with a group services agreement, and since then it has declared no royalty income.

In response to allegations of tax dodging, SABMiller has claimed that under the general services agreement, it was only providing "managerial" services to enable the Indian companies to meet global standards in the absence of research and development facilities. It has said that these services to not constitute royalty transactions.

But the tax official involved in the case said "the rewording is nothing but a transaction designed prima facie for the avoidance of income tax."

SABMiller also told the New Delhi adjudicating authority that under the technology transfer agreement it provided technical assistance in the form of processes, methods, manuals and technical knowledge related to brewing. It said the general services agreement only allowed for the provision of financial consulting, improved personal strategy, marketing, corporate affairs, business advisory services, trade secrets and technical consulting.

The Indian tax authorities contested the claims and submitted a clause-by-clause analysis of the two agreements to the adjudicator. The same technical services that were made available under the technology transfer agreement were covered under the general services agreement as well, they said.

The only difference between the two agreements is that the services fall under different categories and are worded differently. "Analysis of information like presentations, email exchanges and other documents provided by SABMiller shows there isn't any difference between the two agreements," said the tax department source.

Narendra Jain, a Bangalore-based chartered accountant and expert in international taxation, said it was clear that SABMiller had re-characterised the service so that it would not count as royalties. "When declaring business income, the nonresident will be taxed only if they are a permanent establishment in India or have a place of business in India," said Jain. "What the company is trying to do is to establish that this is not royalty, and also that the income is not accruing in India."

"They (SABMiller) have stated a cost-to-cost allocation situation as well, where they are saying they haven't made any profits so why should they pay taxes," Jain said. "This, however, is not applicable on a royalty, as it is assessed on a gross basis. The profit element of a nonresident is not relevant here."

The adjudicator in its order questioned how "world-class beer could be manufactured and plant machinery upgraded and maintained by mere managerial/administrative instructions," as the brewer had suggested.

Since the services provided by SABMiller under the GSA were exclusive and special in nature, they qualified as technical service, the adjudicating authority has inferred. It has further suggested that in the face of growing competition where the company needed to protect and expand its brand, it was unlikely that technical services would not be disseminated.

The adjudicating authority also stated that if the benefits of the services provided by a foreign company were reaped in their own country, then these were taxable in the country of the company's origin. In this case, since the benefits of the services provided by SABMiller were received in India, it would be taxable in India.

Jain said such a situation was a warning to all foreign companies to be careful when trying to minimize tax on royalties in India. "When such a judgment comes, it is a warning which emphasizes that rewording the agreement won't work," he added.

The adjudicating authority's rulings are binding on foreign companies and can only be appealed in certain cases, such as when a judgment has been influenced by fraud or misinterpretation.

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