How interesting

In that case a clearer position emerges that lets us resolve the “extreme” (and legally unjustifiable) position of neoliberalism that says that tax must be avoided and the relativist position that says all charges must be accepted. This summarised in the concept of tax compliance. Tax compliance is seeking to pay the right amount of tax (but no more) in the right place at the right time where right means that the economic substance of the transactions undertaken coincides with the place and form in which they are reported for taxation purposes. This needs a little explanation.

First, the right amount of tax means that the law is properly applied and that the choices available in law are honoured. This means a company can quite legitimately argue with a tax charge it thinks is improperly imposed.

Second, the right place means that tax is due in the country where the economic substance of a transaction arises.

So let us take this as true.

In the Vodafone case the economic substance of the transactions was in Germany. They were and are, after all, flogging phones and air time to Germans. In Germany.  By charging UK tax on this it would appear that Vodafone has overpaid tax to the sum of £1.25 billion.

Lady Green is a non-British citizen living in a non-British jurisdiction. The economic substance of her income is therefore nothing whatsoever to do with the UK or Britain. Just as the economic substance of a US based shareholder receiving dividends from BP, or a Russian one receiving such from a UK based company is nothing to do with the UK or the UK taxman.

Excellent, so, we\’ve got it straight from Ritchie\’s mouth that UKuncut are are simply deluded. Both Vodafone and Lady Green are entirely tax compliant. Indeed, Vodafone is being oppressed by the UK taxman.

And isn\’t that interesting?

11 comments on “How interesting

  1. The Voda case related to the CFC rules – which seek, in some circumstances, to tax the income of foreign subsidiaries of UK companies. They were introduced in 1984 to stop UK companies artificially avoiding UK tax but their reach has been extended to the point that they catch all sorts of arrangements which have no connection with the UK other than that the ultimate parent company is here. In other words, if Vodafone was doing some tax planning (or avoidance, to taste), it was probably in relation to the overseas companies. We don’t know the details, but it may have been inter-company financing where the interest was deductible for German tax purposes at say 40% effectively whilst the interest was being taxed at a lower rate elsewhere. The Luxembourg headline tax rate was around 30% but, with the complete agreement of the Lux authorities, you can have much lower effective rates under certain arrangements. In the absence of such arrangements, the full amount of German tax would have been suffered and there would have been no basis to argue for additional UK taxes either at the time or when dividends were remitted to the UK (because we at that time we gave relief against UK corporation tax for foreign taxes suffered on foreign dividends). Accordingly, if anyone should be protesting it should be the Germans.

    The reforms to the CFC rules which are to be introduced in 2011 and 2012 effectively acknowledge that the current rules are too far-reaching. They will allow groups to do a certain amount of overseas tax planning without a UK tax impact.

    The final point I wanted to make is that the Government can of course change the tax rules anytime if it doesn’t like the planning people do. There’s nothing to stop them at all – except the EU. We are obliged to ensure that our tax law is compatible with the freedoms of establishment and movement of capital enshrined in the EU treaty. The ECJ judgement in the Cadbury Schweppes case showed that the CFC rules are not fully compatible with EU law, and therefore companies such as Vodafone are able to do this type of tax planning across Europe to some extent. That is why the Revenue have been settling cases with a number of companies for much less than they were originally seeking. So maybe the protestors should be blockading Brussels, instead of British high streets.

  2. I definitely agree with you re Vodafone and UK tax. Although it does seem like the deals between Vodafone Germany and Vodafone Luxembourg have left the German taxpayer out of pocket, there’s no real moral claim that the UK government should get the money.

    Re Top Shop, I’m not so sure – the effect of the Greens’ actions has been to ensure that money raised from economic activity that was entirely UK-based has avoided UK tax.

    Tim adds: That last….but no more so than any other foreigner investing in hte UK….

  3. Hmm. That would imply that Lady Green had invested in the UK, which isn’t (in terms of economic substance) the case – Philip is a UK national, and he’s the one who invested in and built the business.

    Tim adds: No. Lady Green is, each and every day that she doesn’t sell the business and go put the money into an investment in another country, investing in the UK.

  4. Only in a narrow legal sense. In real life, we know that Philip built the business, and has put the stock in his wife’s name to avoid tax.

  5. I work in the mobile telecom industry (but not for vodafone) so I know something of the underlying business that the tax arrangements should seek to reflect if they are to have economic substance.

    All operators provide international roaming services. Multinational mobile operators seek to consolidate that operation in one country (for several reasons). Vodafone have also consolidated that operation. In Luxembourg, which has required vodafone to put all sorts of people and assets there (real network assets, not ‘pure financial assets’) to provide that service to the ‘OpCos’ as they are called in vodafone. The LuxCo then charges each OpCo for the roaming services provided.

    So we can be content that the Luxembourg step is NOT an artificial one but a natural consequence of being a multinational mobile operator looking to gain synergies from the UK/German merger. And the money flows reflect that underlying business reality.

    My guess is that vodafone tried explaining this to hmrc who just glazed over.

    I posted this once to ritchie, and invited him to explain to his readers the underlying vf business and why the tax arrangements did or did not reflect the economic substance of the roaming operations based in Luxembourg.

    He deleted my comment.

  6. John B – I know nothing of the Greens’s arrangements. However, if he has “put the shares in his wife’s name” that sounds a little like the Arctic Systems case – where the House of Lords ultimately held in favour of the taxpayer. The Government (this administration and the last) has had plenty of time to dream up legislation to prevent this planning but has been unable to do so in a way which is at all workable. I suppose we could abolish independent taxation of married couples and go back to the system which prevailed until around 1991. That might upset the feminists though.

    Final point – if Lady Green was resident in a country which charged a similar amount of tax on the dividends as a UK resident would pay – would the protesters still be howling? If not, why not?

  7. Highly Taxed
    Not too similar really to Arctic Systems. Lady Green is non-uk domiciled and non-UK resident so the UK’s rules don’t apply to her.
    When her husband gifted her his shares, he had to survive the date of the gift by 7 years as a gift by a UK-domiciled person to a non-UK domiciled spouse isn’t a totally exempt tax-free gift. Only the first £55k of the gift is tax-free. The balance is a potentially exempt transfer for IHT purposes.
    The Greens didnt make the rules, of course.

  8. David – the point I was making, in response to John B, is that the courts have decided that a husband and wife can arrange their affairs in this way in relation to a privately owned company so that the wife, not the husband, will therefore be taxed on the dividend income. It’s wrong to say that the UK’s rules don’t apply to her. Even as a non-resident she remains within the scope of UK tax on UK source income – it’s simply that she has no further liability on dividend income (there is a tacit recognition in the tax system of the fact that dividends are paid out of the post-tax profits of a company). Lots of UK couples do similar planning on a modest scale so a basic rate taxpayer spouse can receive dividends without further tax charge where the other spouse would pay an effective 36%.

    I don’t know her domicile status but, if you’re right, your comments on IHT are interesting but irrelevant to the point I was trying (and evidently failing) to make.

  9. Never mind how the govt already p+sses up a large proprtion of £600bn up against the proverbial, if only the rich/companies/bankers paid more tax then we could carry on living for free…….

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