Microsoft-Nokia Deal: Finnish Firm, Embroiled In Local Tax Dispute, Could End Up Operating India Plant For A Year

Nokia Corporation’s (NYSE:NOK) sale of its mobile-phone division to Microsoft Corp. (NASDAQ:MSFT) for $7.5 billion is expected to close Friday, but the future of one of the Finnish firm’s global facilities, in the southern Indian city of Chennai, hangs in the balance following a tax row with the Indian government.

Nokia said on Thursday that there is a “very strong likelihood” that the company would not be able to include the India factory in the deal to transfer its phone business to Microsoft. The Espoo, Finland-based smartphone manufacturer, which has been charged by Indian tax authorities with wrongly claiming tax exemptions on software exports, also said that it would be “surprising” if the issue was settled before Friday.

“It's highly unlikely that the plant will transfer, given that the (deal) closing with Microsoft is tomorrow,” a Nokia spokeswoman told Reuters. “If the asset doesn't get transferred, we are entering into a service agreement with Microsoft.”

Nokia lawyers had previously told Indian authorities that the company could run the Chennai plant as a contract manufacturer if the tax dispute was not resolved before completion of the deal with Microsoft. However, Nokia stated on Thursday that such a contract would stay in place for only one year.

Nokia’s Chennai plant, which employs nearly 7,500 people, is one of the company’s biggest factories globally. The facility became a focal point of two tax disputes -- one involving the local state government and another with the country's apex court.

In March, India's Supreme Court ordered Nokia to provide a guarantee worth 35 billion Indian rupees ($573 million) and waive some of its defense rights before it transferred the plant to Microsoft. The company was also handed a tax bill worth 300 million euros ($415 million) by the southern Indian state of Tamil Nadu, where Chennai is located, for selling phones domestically, instead of exporting them, Quartz, an online publication, reported.

While the Chennai plant, which was viewed by locals as a key employment opportunity, awaits an uncertain fate, 700 trainees have reportedly left their jobs and Nokia has also begun offering voluntary retirement packages for the plant's employees.