Vodafone Gets Good News in Ongoing Tax Dispute

Vodafone received some good news in a recent case at the European Court of Justice over a tax battle with the UK government which could cost it some £2.5 (US$4.7) billion if the company loses. A recent ruling by the ECJ in favour of the confectionary and drinks manufacturer, Cadbury Schweppes that using offshore corporations to reduce home taxes may not be illegal under EU laws.

Under UK tax legislation, the profits of a foreign company in which a UK company owns a holding of more than 50% (known as a controlled foreign company, or CFC) are attributed to the resident company and subjected to tax in the UK, where the corporation tax in the foreign country is less than three quarters of the rate applicable in the United Kingdom. The resident company receives a tax credit for the tax paid by the CFC. That system is designed to make the resident company pay the difference between the tax paid in the foreign country and the tax which would have been paid if the company had been resident in the United Kingdom.

The law has an exception that prevents a UK company using this specifically to minimize their UK tax liabilities.

In the court case, Cadbury had argued that the exception was against Community law, in particular in the light of freedom of establishment. The court noted that while a company cannot improperly or fraudulently take advantage of provisions of Community law. However, the fact that a company was established in a Member State for the purpose of benefiting from more favourable legislation does not in itself suffice to constitute an abuse of the freedom of establishment.

How does this affect Vodafone?

Well, when Vodafone launched its takeover of Germany's Mannesmann six years ago - the company enacted the takeover via a subsidiary based in Luxembourg, apparently for tax minimization purposes. The UK is arguing through the European Court that Vodafone should not benefit from lower tax rates from a company, Vodafone Investments Luxembourg - which was apparently set up specifically to reduce tax liabilities. The recent court ruling in favour of Cadbury would seem to suggest that Vodafone is likely to win its court battle as well.

The company has set aside £2.5 (US$4.7) billion should it lose the lawsuit, although the company had estimated its liabilities at £1.76 (US$3.3) billion in its 2005 financial accounts. The stock market was shocked earlier this year when the company warned in its 2006 annual results that future tax liabilities could reach

Posted to the site on 2nd October 2006