Vodafone licks lips at Cadbury judgement

Amid the continuing fallout from the controlled foreign companies cases going
through the European courts, one case will be worrying the government more than
any other: that of Vodafone.

It will concern HMRC because, where the Cadbury case was worth £8m,
Vodafone’s is worth almost £2bn, according to its filings.

Vodafone has been admirably open about its contest with the taxman over its
Luxembourg subsidiary, VIL. The subsidiary appears to have been a vehicle for
managing Vodafone’s takeover, six years ago, of German mobile phone company
Mannesmann in a tax-effective way, according to court documents.

On the face of it, Vodafone’s legal argument has suffered a blow as a result
of recent judgments on controlled foreign companies (CFCs). The company had
claimed that the rules were contrary to freedom of establishment, and, since
that was the case, it did not even need to respond to the taxman.

But the European Court of Justice’s judgement in the Cadbury case made clear
that the court did not regard the UK rules as breaking the EC treaty per se,
although it still left that open in part.

In any case, Vodafone has always said it has further arguments, which must
explain why chairman Arun Sarin is so bullish on the issue.

Speaking at a conference in New York, Sarin said he was ‘feeling good’ about
Vodafone’s chances after the Cadbury case.

‘Obviously, the Cadbury case is very helpful for the Vodafone case, which
will be heard next year. We are feeling good about what might happen with us
next year in this particular regard,’ Sarin said.

Why the case is so helpful to Vodafone is less obvious to outsiders, perhaps,
than to Sarin, but investors will welcome his confidence.

Vodafone’s disclosure of a potential £5bn of liabilities and weaker than
expected results sent the company’s share price plunging by 10% on the day it
made its disclosure.

The tax authorities, Sarin, Vodafone finance director Andy Halford and
investors with a stake in the company could face a few more jittery days on the
path to resolving the company’s mammoth tax battle.

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