Commissioners duck Vodafone tax query

Special commissioners delay conclusion of £2bn tax case to the ECJ

Written by Nicholas Neveling

Accountancy Age, 08 Aug 2007

Vodafone will have to wait and see whether its £2bn controlled foreign company tax dispute with the revenue will be shut down after the special commissioners said that key questions about the economic substance of the Vodafone's Luxembourg subsidiary still needed to be answered.

Vodafone, which has been locked in a £2bn battle with the taxman over the subsidiary, will now have to appear at a second hearing before the commissioners where it will be decided whether the company is conducting genuine economic activity.

The commissioners had been asked to decide whether or not to refer the case, known as Vodafone 2, to the European Court of Justice.

Vodafone 2 follows a similar CFC case led by Cadbury Schweppes, which went before the ECJ last year. The ECJ said that Cadbury Schweppes should be exempt from the UK's CFC rules as long as it could show that subsidiaries based in low-tax regions were conducting economic activity of genuine substance.

In the Vodafone 2 case it was left to the special commissioners to decide whether UK domestic rules could be interpreted in such a way as to include the substance test specified by the ECJ, as the UK rules could have been seen as too formulaic to incorporate the ECJ opinion.

The commissioner panel, John Walters QC and Theodore Wallace, were divided over whether local rules could be interpreted in this way. Wallace said that they could not and that Vodafone 2 should be referred back to ECJ because of this.

But panel chair Walters said a referral to the ECJ was not necessary, which means that Vodafone will now only have to prove the economic substance of its Luxembourg arm and will not have to go through Europe first.

Chris Morgan, KPMG's head of international tax, said the judgment was small victory for Vodafone.

'Ideally Vodafone would have liked the special commissioners to deal with the question of substance in addition to the legal question, but it can take some encouragement from the fact that the legal matter will not have to go all the way through Europe,' Morgan said.