Britain-based Vodafone, embroiled in a tax controversy in India, was in the eye of a storm in its home country where, as late as December last year, a parliamentary panel alleged the company’s deal with UK’s tax authorities waived a potential tax of about £6 billion and might have been illegal. Vodafone has strongly denied the claim.
Also, an investigation in London has suggested Vodafone attributes profits to branches in tax havens. Again, the company says this is not true.
In July 2010, Vodafone settled a dispute with the UK tax authorities over its foreign earnings by agreeing to pay Her Majesty's Revenue and Customs (HMRC) £1.25 billion. A parliamentary panel later alleged the deal waived a potential tax of about £6 billion and might have been illegal. The U.K. government and Vodafone have denied the claims.
“Vodafone is not involved in a tax dispute in the UK. There was a long running dispute about complex ‘controlled foreign company’ rules, which following nine years of litigation, was settled in July 2010, after HMRC had conducted a detailed and rigorous examination of the facts. As a result of which, a full and final settlement of £1.25bn was reached, bringing all matters to a conclusion. The settlement was not illegal,” said Ben Padovan, head of group media relations at Vodafone in an e-mail reply to questions sent by Business Standard.
“The £6 bn figure is erroneous, wholly speculative and has no basis in fact. Even HMRC themselves, describe this imaginary figure of £6bn as an ‘urban myth’.”
Origin
The dispute began in 2000, when Vodafone acquired Mannesmann, a German engineering and telecom conglomerate, for £112 bn. The deal was through a subsidiary in Luxembourg. Vodafone reportedly began routing profits from the acquisition through the tax haven. It caught the eye of HMRC, which wanted to tax the profits of the Luxembourg subsidiary. The media in British called it one of the country’s biggest legal battles over international tax.
“By channelling finance and profits through tax-haven subsidiaries, telecoms giant Vodafone is alleged to have avoided paying the British government billions of pounds in tax,” the Bureau of Investigative Journalism, a London-based not-for-profit organisation, said in a report.
What happened after this had some similarities with the developments on Vodafone’s case in India. First, the ruling of a London tribunal was in favour of the tax department, but was overturned by a high court. The relief was short-lived for the telecom company, as the court verdict was reversed by the Court of Appeal. After which, HMRC negotiated a settlement with Vodafone, flayed by the parliamentary panel.
“The government would have come under similar attacks by parliamentarians in India had it not pursued the tax demand on Vodafone,” said a finance ministry official.
Sting
Last month, an undercover operation by the Bureau of Investigative Journalism and Private Eye, a UK-based magazine, alleged Vodafone's Swiss branches were run by a single part-time bookkeeper, with hardly any business done from there, indicating their main purpose was tax avoidance. It was shown that Vodafone’s Luxembourg subsidiary gave a loan to US-based Vodafone Holdings, which owns 45 per cent stake in Verizon Wireless.
The investigation claimed the money was borrowed from the Swiss branch of the Luxembourg company, allowing it to take advantage of Luxembourg’s laws, which exempt the foreign branches of companies from tax, and Swiss laws, which almost completely exempt local branches of foreign companies. According to Private Eye, this would have otherwise generated a British tax bill of a little over £2 bn.
It said Vodafone publishes a single, combined set of accounts for its Luxembourg subsidiaries and their Swiss branches. For the one company, profits worth £1.6 billion were taxed at less than one per cent in 2011, and the profits are likely to have been attributed to Switzerland.
In its response to these allegations, Vodafone has said the Swiss branch has not been involved in Vodafone’s global financing for a number of years. It is, therefore, irrelevant in respect to global financing arrangements.
“The Swiss office is a branch of our Luxembourg subsidiary and plays no significant role in the financial management of the group, and has not done so for a number of years. It is therefore irrelevant when considering tax,” said Padovan, adding, “The BIJ and Private Eye have confused Vodafone with a company that claims it has material activities or operations in Switzerland. We do not make such a claim and our tax filings do not suggest that this is the case.”
