Vodafone escapes £2bn tax bill

Vodafone is celebrating a decision by the High Court which means it will avoid footing a £2bn tax bill.

The High Court shot down the tax authorities attempts to make the mobile phone giant stump up £2bn after it snapped up German company Mannesman through its Luxembourg subsidiary.

UK tax chiefs have stood their ground on controlled foreign companies ever since a European Court Justice ruling in 2006 which exempted gains made in overseas locations from being treated as UK taxable income as long as profits were generated from 'genuine economic activity'.

The ECJ has said that it is down to the British courts to decide whether such acquisitions do not pass muster in terms of the 'motive test'. The CFC rules do not apply if a company meets the test's requirements.

Bill Dodwell, tax partner and head of tax policy at Deloitte, said: 'The judge has decided that UK CFC law is in effect unenforceable in respect of CFCs established in EU member states. He reached the conclusion that UK law is not compatible and, following the recent House of Lords decision in Conde Nast, concluded that it's not up to the courts to decide how to make UK law compatible. Instead, this is a matter for parliament and, since parliament has not changed the law, the existing law is ineffective. As a result, the UK cannot charge tax on the profits of low-taxed EU-based subsidiaries.'

Dodwell believed that the Treasury would hit back with an appeal on the ruling and also forecasted a change to the smallprint of the UK's tax rules to allow for the ECJ's position.

'The Treasury are likely to need to change UK law to allow "genuine economic activities" within the EU, said Dodwell. 'The precise meaning of this phrase will itself be subject to litigation, as the facts of the Cadbury case is expected to come to the UK courts next year.'

Dodwell added thatthe case put further pressure on the Government to hammer out a speedy resolution to its foreign profits changes as corporates and advisers wait for a steer on the framework in which they will have to operate, going forward.

'Deloitte hopes that the Treasury will introduce a tax exemption for dividends from overseas from 1 April 2009 and at the same time consult widely on how best to protect the UK tax base, whilst supporting UK-headquartered multinationals,' he added.