Vodafone tax judgement offers some clarity

Vodafone’s tax case before the special commissioners may provide some comfort
for finance directors, tax advisers have indicated, as the turmoil over the UK’s
controlled foreign companies rules deepens.

The company has been seeking to close down an enquiry by HM Revenue &
Customs over a Luxembourg subsidiary, with the tax bill at stake running to
almost £2.5bn, according to Vodafone’ estimates.

In the latest hearing on the case, the special commissioners considered
whether the matter should be referred to the European Court of Justice. But the
special commissioners ruled by a casting vote that a previous decision on
Cadbury Schweppes should be ‘read down’ into the Vodafone case, without
complicating matters further by going again to the ECJ.

‘The decision should provide reassurance [for FDs]. It said Cadbury Schweppes
is the be-all and end-all, and the question is ‘do you have economic
substance’,’ said Chris Morgan, an international tax expert at KPMG.

The CFC rules are thus surviving challenges to their compatibility with EU
rules, but subject to a crucial proviso that UK companies can use to defend
their positions.

The ECJ ruled in Cadbury Schweppes’ case that as long as there was genuine
economic substance in an offshore subsidiary, it could not be hit by the UK’s
CFC rules.

‘Such a tax measure must not be applied where it is proven, on the basis of
objective factors which are ascertainable by third parties, that despite the
existence of tax motives that controlled company is actually established in the
host member state and carries on genuine economic activities there,’ the court

The interest in big cases like Vodafone’s and Cadbury Schweppes is to
determine what that may mean in UK law. That will be decided in hearings in both
cases on the facts, one in relation to Vodafone’s Luxembourg subsidiary and the
other over Cadbury’s Irish subsidiary.

There is also the added complication that a group litigation order is also
going to Europe on the issue. It concerns several kinds of structures, it is
thought, so that may not disrupt the fundamentals of the Cadbury judgment

The CFC rules are there to prevent companies from placing income-producing
assets outside the UK. If a company is treated as a CFC, its income becomes part
of UK taxable income.

The government is currently trying to revamp the rules to take account of the
challenges to them and also to tighten up the rules.

It is particularly exercised by the idea of companies setting up Treasury
functions or intellectual property abroad, and having the income taxed at lower
foreign rates.

Morgan says the government is looking at rules to bring all offshore ‘mobile’
income into the UK tax net, meaning overseas intellectual property subsidiaries
overseas being affected.

That looks certain to create huge complications for companies, as the
government effectively looks to tax certain types of income on a worldwide

‘FDs would have to identify the particular type of income in every
subsidiary, tax it in the UK and work out what foreign credits attach to that
income,’ Morgan said.

The rules have been widely criticised by advisers and by companies, and are
currently under review.


Bonus of £5m for Sports Direct FD

The finance director of battered sports retailer Sports Direct has been given
a £5m bonus for his ‘important contribution to the development of the company’.
Bob Mellors received the bonus despite a tumultuous and fractious relationship
with investors and analysts, and a plummeting share price that has more than
halved in Sports Direct’s first five months as a listed company. Half of the £5m
has been paid already and the rest will be paid next spring. Mellor’s £150,000
salary is relatively small compared with that of other FTSE FDs. He also has no
shares in the company and does not receive any company pension benefits.

Payback time for Securitas

Securitas has agreed to pay back about £15m to the Bank of England after
uncovering discrepancies at its UK cash handling unit, Loomis Cash Management.
Loomis, which is operated as a joint venture with HSBC and Barclays, has set
aside the £15m provision after discovering that it had been overstating the
value of notes held in its sorting process ‘for some time’. The charge will
cover lost interest and the cost of the Bank’s investigation, which is being led
by KPMG.

Pension deficits cuts

FTSE 100 companies have dramatically reduced their pension scheme deficits
over the past 12 months, to post a surplus of £12bn. The latest Accounting For
Pensions survey by Lane Clark & Peacock reveals that the FTSE 100 turned
around a £36bn deficit from 2006 into a surplus just a year later. The companies
achieved the turnaround through a combination of record contributions into their
schemes Ð of £13bn, and favourable investment returns. The survey also found
that each additional year of life expectancy factored into pension calculations
costs the schemes a total of

£12bn. Bob Scott, partner at LCP, said: ‘It is encouraging to see UK pension
schemes of FTSE 100 companies report a surplus after so many years in the red.

Aga cold on bills

Stove-maker Aga is the slowest FTSE 250 company to pay its bills, taking an
average of 81 days to pay up according to a survey by the Institute of Credit
Management. The survey found that the average time taken by a FTSE 250 business
to pay its bill is 27 days. The institute warned that some larger companies were
‘deliberately manipulating’ credit terms so although they appeared to pay on
time, their smaller suppliers were actually waiting longer to receive payment.

Satisfying reward

Companies are increasingly rewarding top executives on the basis of
non-financial measures such as customer satisfaction, employee engagement and
environmental performance,

PricewaterhouseCoopers has said. There has been a dramatic growth in the
number of bonus packages offered on a combination of financial, non-financial
and individual measures, the firm said. According to the Big Four firm, some 13%
of packages were based on such criteria in 2005/06, and 31% in 2006/07. Duncan
Brown of PwC said: ‘We are seeing a continuing shift towards variable pay in UK
plcs and a growing emphasis on long-term performance when determining executive

Backdating conviction

The first guilty verdict in an options backdating case has been handed down
by a jury in a San Francisco court this week. The conviction of Gregory Reyes,
44, former chief executive of Brocade Communications Systems, on all ten counts
in the government’s first criminal prosecution for options backdating could
herald the start of a new wave of convictions. Some 170 others have been charged
and are being investigated by the US securities regulator on similar counts.

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