Vodafone Wins $3.3 Billion Tax Battle
Vodafone has won a huge tax battle with the UK government over its 1999 acquisition of Germany's Mannesmann. The company had 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 UK High Court ruled on Friday that the Revenue & Customs department should close its investigation into Vodafone's 2001 accounts after deciding that it would be unlawful to apply UK rates of corporation tax to a subsidiary based in Luxembourg.
Under UK tax legislation introduced in 1988, 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. However, a court case won by confectionery and drinks group, Cadbury found that this breached EU rules, and hence also benefited Vodafone.
The Revenue & Customs said it would appeal, saying that "the government will continue to defend its ability to enforce the CFC rules, which are designed to counter tax avoidance through artificial shifting of profits to offshore subsidiaries."
Vodafone is also currently embroiled in a US$2 billion tax dispute in India over its purchase of Hutchison Essar - which is expected to conclude later this week.
Posted to the site on 6th July 2008
