Vodafone ruling prolongs CFC confusion

An ongoing tax dispute between Vodafone and HM Revenue & Customs has done little to clarify the tax rules for companies operating outside the UK, after the Court of Appeal last week overturned an earlier decision by the High Court.

The Court of Appeal ruled against the mobile phone giant which argued that UK rules on the taxation of profits of foreign subsidiaries ­ controlled foreign companies ­ was incompatible with European Union law.

Vodafone provisioned £2.2bn in its 2008 accounts in the event that it has to pay up.

The dispute centers on the payment of taxes on the company’s Luxembourg subsidiary where Vodafone registered Mannesman, the German mobile giant it acquired in 2000.

The case has also highlighted discrepancies in the application of cross-border CFC rules.

A spokesman for Vodafone confirmed that the company will be appealing to the House of Lords on the basis that it has been conducting ‘genuine economic activity’ in its Luxembourg subsidiary.

‘It’s flip-flopping from the High Court’s decision of last July,’ he said.

According to Bill Dodwell, head of tax policy at Deloitte, there is currently no precedent on such cases as similar disputes are yet to be litigated.

‘We’ve had no court of judgment on what genuine economic activity is, which is why we’re all struggling. It’s the big unanswered question,’ he said.