Vodafone in new tax 'scandal'
The world's largest mobile phone company Vodafone Group has shaved 1billion pounds
LONDON – and possibly more, off the taxes its UK operating unit might have paid in the past decade, thanks to accounting factors not seen at other European units.
A Reuters examination of statutory filings made by Vodafone across Europe over the past 16 years shows the UK taxman has often gone empty handed, while tax authorities in Germany, Spain and elsewhere have raked in billions of euros.
Indeed, rather than incurring UK tax in recent years, Vodafone has racked up tax credits such that it may not have to pay any tax on its UK operations for the foreseeable future.
Vodafone's low UK tax bill is in spite of soaring revenues here and the fact that Chief Executive Vittorio Colao has repeatedly told investors that Britain was one of the group's stronger performing markets.
"This is yet another tax scandal," said Member of Parliament Margaret Hodge, chair of the parliamentary Public Accounts Committee, which scrutinises public expenditure and revenue-raising.
"It may be legal, but it's completely immoral. They make money out of Britain, and they should put money back into Britain."
Vodafone declined to answer most questions about its accounts, citing commercial sensitivity. It said it was committed to acting with integrity and transparency in all tax matters, while also having a responsibility to shareholders to control tax costs.
There is no suggestion the company has behaved unlawfully, and arranging its affairs in a tax-efficient manner within the law is standard business practice.
"Paying more than was required would be a dereliction of duty to shareholders," said Robin Bienenstock, research analyst at Sanford C Bernstein in London.
The British tax authorities, which MPs last year accused of being "too cosy" with big business, the Treasury and Vodafone Limited's auditor Deloitte said they could not comment on individual companies' tax affairs.
Tax avoidance is already at the top of the political agenda in the UK; last week Prime Minister David Cameron said popular comedian Jimmy Carr was "morally wrong" to shelter 3.3 million pounds of income from tax by using an apparently legal tax avoidance scheme.
Tax campaigners say the tough approach to individuals avoiding tax contrasts with a lax approach toward corporations doing the same.
HOW DO THEY DO IT?
Between 1998 and 2003, Vodafone's UK unit, Vodafone Ltd, made annual profits of around 530 million pounds and paid taxes of around 170 million each year, its accounts show.
While revenues have soared since 2003, reported profits have plunged. In the past three years, the UK unit has racked up losses in excess of 100 million pounds each year.
The profit collapse is tied to two factors, the accounts show.
In 2001, Vodafone limited began making large interest payments on money it borrowed from companies within the Vodafone group.
In the 10 most recent years for which accounts have been published, Vodafone Ltd paid associated companies 3.3 billion pounds in interest.
This reduced the UK unit's taxable profits by a commensurate amount because interest payments are taxdeductible.
Using the prevailing corporation tax rates at the time, this translated to savings worth 961 million pounds to Vodafone Ltd, either in reduced taxes, or by generating tax credits that could be used to offset future profits.
Tax experts say there have been cases where UK companies have established units in Luxembourg, which then lend the money back to UK units, as a tax avoidance mechanism.
This reduces profit in the UK, where corporate profits are taxed at 24 percent - down from 30 percent a few years ago - while generating profits in Luxembourg, where financial profits can be taxed at rates under 1 percent.
Vodafone has a Luxembourg-based unit, Vodafone Investments Luxembourg S.a.r.l., which it says on its website was "established as the main financing company for our many operations around the world".
A spokesman said Vodafone Limited's interest payments were to other UK-based units of Vodafone but declined to say whether these units had in turn borrowed the money from Vodafone Investments Luxembourg.
The dramatic rise in inter-company interest payments seen at the UK unit is not reflected at other Vodafone units in Europe.
Vodafone D2 GmbH, the phone giant's Duesseldorf-based German unit, paid less than 2 million euros in interest to affiliated companies in the year to March 2011, the most recent year for which accounts are available. Vodafone Espana paid 43 million euros in interest to group companies in that year.
Accounts for the holding company for the Italian operations do not break down interest payments between affiliated and non-affiliated companies but do not show any significant rise in overall interest payments since 2007.