(Bloomberg) — Prime Minister Narendra Modi needs to offer much more than just his best intentions to clean up India’s whimsical tax regime to help convince insurers.
Companies from Allianz SE to American International Group Inc. are avoiding offering tax-liability coverage in India’s cross-border mergers and acquisitions market because of a relatively high risk of disputes. None of the 21 general insurers operating in the country provides cover for tax risks arising from M&A transactions.
“No one is comfortable offering that product in geographies without a stable tax regime,” said Sushant Sarin, senior vice president for commercial lines and broking at Tata AIG General Insurance Co., the local unit of the New York-based insurer. “Demand for insurance cover on cross-border deals tax risks in India has been surging, though.”
More than a year after coming to power, Modi has failed to allay investor concerns over a law that allows authorities to make retrospective tax claims. Instead of repealing it, he promised to refrain from reviewing old deals, adding to the muddle as authorities face pressure to boost one of the world’s lowest tax collection rates.
Tax indemnity insurance is purchased either by the buyer or seller involved in an acquisition, where a known tax issue has been identified during due diligence process. The insurer typically agrees to compensate for any additional taxes, interest or penalty that has to be paid by the insured in the transaction.
Cross-border deals involving overseas companies and their Indian units spark transfer-pricing questions about how to value the transactions for tax purposes. Modi has blamed decisions by the previous government for some of the recent tussles.
Some of the companies embroiled in tax disputes with India’s finance ministry include Nokia OYJ, Vodafone Group Plc, Cairn India Ltd. and Cadbury chocolate maker Mondelez International Inc. for total claims of about $10 billion.
In the Nokia case, tax spats forced the company to suspend operations at its factory in Chennai last year, with thousands of workers offered voluntary retirement.
The $3 billion case over capital gains from Vodafone’s 2007 acquisition of Hutchison Whampoa Ltd.’s Indian business is going into international arbitration even after India’s Supreme Court ruled against the government’s claim in 2012. Cairn India has said its $3.3 billion dispute will deter overseas investment. Mondelez is contesting an excise duty claim.
The bad press may be deterring some companies from pursuing deals in India, said Jacob Mathew, managing director and co- founder of Mumbai-based investment bank MAPE Advisory Group Pvt.