At least 25 percent of the total global iPhone production has now migrated to India. Apple aims to reduce its dependence on the manufacturing location in China and, at the same time, avoid potentially high tariffs on products from the People's Republic. However, the company now faces a billion-dollar problem on the subcontinent itself: there could be high tax demands from Delhi within the framework of Apple's usual manufacturer model should the company fail to achieve changes in regulations and laws. This is reported by news agency Reuters.
Apple is not allowed to finance machines
The reason is the way Apple normally proceeds with its production: although it is outsourced to large contract manufacturers—in India, besides Foxconn, Tata, and others—Apple controls the manufacturing very closely. This leads to the company also purchasing the often extremely expensive machines that the manufacturers then use. The contractors are sometimes not even able to acquire them, which is why Apple takes over this task, it is said. The machines are not handed over to the contractors but are only located in their factory halls; they remain the property of Apple itself.
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While this does not seem to pose a tax problem in China, according to Reuters, it looks completely different in India. According to the Income Tax Act there, ownership of the machines would imply a direct “business connection” to the iPhones produced. This would then mean that Apple's later smartphone profits would suddenly be subject to taxes, according to an Indian official and two industry sources with whom Reuters spoke. So far, billions of US dollars are said to have flowed through Foxconn, Tata & Co. into the construction of factories in India, millions of them for the production machines.
Expansion of production could stall
Apparently, Apple has not financed any of the machines so far in order not to fall under the Income Tax Act, which was introduced in 1961. However, when expanding production, this would probably have to happen, observers say. “Contract manufacturers can only spend money up to a certain extent,” an expert told Reuters. Only if the law changes could Apple expand more easily on the subcontinent. “India would thus be more competitive worldwide.”
The company is therefore said to be intensively lobbying for a change in the Income Tax Act. The request has already been received in Delhi, where smartphone manufacturing is considered an important industrial factor in politics. Apple's proposal is already on the table and is being “carefully examined,” it is said. This is a difficult decision, according to informed circles. However, India risks losing billions in investments, as the machines are sometimes that expensive. Apple, in turn, is not willing to pay billions in taxes to Delhi.
