Speedy tax resolution unlikely for Vodafone

In a note to its preliminary numbers,
mobile phone giant
said it did not expect ‘resolution’ of the issue ‘in the
near term’.

The £1.7bn battle is one of the largest tax cases of recent years, and is
being closely watched by finance directors nervous about the government’s
attitude to controlled foreign companies rules.

Court papers on the case make clear that it concerns the £112bn deal to take
over the German mobile group Mannesmann, sealed in 2000.

HM Revenue & Customs started asking questions about the deal in 2002,
inquiring about both a Luxembourg and German subsidiary.

Investments Luxembourg, into which shares in Mannesmann were moved, was subject
to the ‘motive test’ and so outside UK CFC rules, Vodafone had said, while the
German firm, Vodafone Deutschland, met the ‘exempt activities’ test.

The case came before the Special Commissioners in 2005, but has not moved on
extensively since.
The mobile phone group initially claimed it did not have to respond to HMRC
enquiries since the CFC rules were contrary to EU law.

Last summer, the two parties were still discussing that issue and whether it
was necessary to go to the ECJ over the matter, like Cadbury Schweppes already
has done.

In the meantime, CFCs have become the hot topic of big business tax
discussion: Shire and United Business Media are leaving the country over plans
to tighten the rules.

Vodafone’s tax affairs have proved some of the most intractable of any
company’s in recent years. It was a party to the multi-billion pound action to
reclaim VAT on 3G mobile phone licences (which it lost), and is fighting a case
in India too.

Joel Walters, the group head of tax, said that the large numbers involved in
big disputes created a sense that there was a lot of tax avoidance going on.
‘[The numbers] create an illusion that there are significant issues.

I’m concerned that once this perception begins to permeate the taxing agency,
what tends to happen is that the focus comes on enforcing the tax loss.’

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