What's to make of Nokia's Indian tax appeal loss?

Chris Lau, Kapitall: Nokia lost its tax appeal with the Indian Supreme Court. How will this affect Nokia stock?

Just as Nokia (NOK) was about to transfer its devices units to Microsoft (MSFT), the company hit a snag. Last week the Supreme Court in India upheld a lower court ruling that Nokia owes 35 billion rupees in taxes. Nokia is trading at multiple tops: its shares tried many times to break the $8 level. How should investors react to the latest setback?

Nokia loses appeal

India’s lower court previously ruled Nokia owed tax following the transfer of ownership of a Nokia factory to Microsoft. The setback is negative for Nokia shareholders, because it represents a big part of the smartphone business that must be transferred to Microsoft.

Nokia’s business transformation is already facing hiccups. The company has massive cash thanks to the sale, but its network and maps divisions need management’s focus to operate more profitably.

Nokia’s India asset stuck

India’s tax policy for foreign firms is unpredictable, so Nokia shareholders should be aware of the political uncertainty surrounding the factory sale.

The Finnish phone maker must tread carefully with India as it negotiates its tax liability. It is possible the company will need to cease investments in the factory (though it remains shut down), otherwise its potential tax burden will increase. On the other hand, by creating lost employment opportunities, India will be pressured to relax its terms.

Nokia shares dip

Abandon factory

Nokia might even need to consider abandoning the factory, along with this portion of the sale to Microsoft.  Forgoing the profit will set a precedent for Nokia’s other business objectives. Future contracts, acquisitions, and businesses done in its maps and networking divisions will include stronger contract wording minimizing such liabilities.

Conclusion

If Nokia takes a hard approach in India, its shares will sell off in the short-term because it will receive less cash from Microsoft. Shares will eventually recover, because it will demonstrate that Nokia’s management will not be bullied by sovereign countries.

Click on the interactive chart to view data over time. 

 

1. Nokia Corporation ( NOK): Provides Internet and digital mapping and navigation services worldwide. Market cap at $28.29B, most recent closing price at $7.62.

 

 

2. Microsoft Corporation ( MSFT): Develops, licenses, and supports a range of software products and services for various computing devices worldwide. Market cap at $313.81B, most recent closing price at $37.69.

Written by Chris Lau, a Kapitall contributor.

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