The new new Vodafone tax scandal

This is going to be a fun story.

Accounts filed in Dublin show that in 2009, HMRC settled a dispute with Vodafone over its Irish tax returns. The overall size of the settlement has not been revealed, but it involved Vodafone reclaiming €67m from the Irish government in tax that should have been paid in the UK.

So, Vodafone has paid more tax to the UK than it originally thought it ought to. This is going to be a scandal how?

Plus. they\’re still not getting the basic point about corporate taxation:

The UK-based mobile phone group used an Irish subsidiary, which employed no staff between 2002 and 2007, to collect hundreds of millions of pounds a year in royalty payments from operating companies and joint ventures around the world. By 2007, Vodafone Ireland Marketing Ltd, a company registered to an industrial estate in the Dublin suburb of Leopardstown, was reporting a turnover of €380m (£320m) a year.

During a four-year period, these royalty payments, collected from most countries except the UK and Italy, have helped Vodafone send more than €1bn worth of dividends to the low tax jurisdiction of Luxembourg from Dublin. The dividends, which include a final payment of €142m due to be delivered this year, came from profits made after taking advantage of Ireland\’s low corporation tax rates.

The law is different now but in that period none of this really made much difference. It allowed Vodafone to delay tax payments but not to miss them altogether. For if that money was brought into the UK in order to pay a dividend (the ultimate aim of any company of course) then it was taxable at full UK corporation tax rates, minus tax already paid elsewhere.

The company confirmed its Irish settlement had never been separately disclosed in its annual reports, and was not connected to a £1.25bn payment to HM Revenue and Customs in 2010 to settle a much publicised dispute over the use of a Luxembourg subsidiary.

That\’s what this payment was of course.

All these shenannigans, they can\’t (or in the past, could not) avoid tax for a UK domiciled company. All they could do was delay it. Because the moment the cash crosses the border in order to be paid to shareholders it\’s taxable.

19 comments on “The new new Vodafone tax scandal

  1. These days, as you say, dividends received by Vodafone in the UK from its non-UK subsidiaries are (mostly… this is tax, after all, so things are never simple) exempt from UK tax. As you’d expect. Any dividend Vodafone pays is net of UK corporation tax. Any dividend Vodafone receives from its subsidiaries is, we presume, net of that country’s corporation tax. We don’t really want profits to be taxed more than once, do we?

  2. “The overall size of the settlement has not been revealed, but it involved Vodafone reclaiming €67m from the Irish government in tax that should have been paid in the UK.”

    As is normal in tax journalism, this is vary badly worded and it is not at all clear what was going on, but I would hazard a guess that there was a company in the Vodafone group that Vodafone argued was Irish tax resident for one or more of the accounting periods under dispute (and therefore paid €67m in tax) while HMRC argued that it was UK resident by virtue of management and control, in which case if HMRC won and tax was payable in the UK, the €67m paid in Ireland would have been recoverable under the applicable double taxation treaty, while a much larger tax liability would have been paid in the UK.

  3. “The law is different now but in that period none of this really made much difference.”

    So why was it done? Granted that the point wasn’t tax avoidance, what was the point?

  4. Cold be almost anything. They seem to have been using a single Irish company for licensing IP across the world… maybe the point was just to replace a complex web of IP licenses going all over the place with a simpler model?

    I’m a tax advisor so I don’t really believe it, but I have heard it alleged that companies occasionally enter into transactions for legal or commercial reasons rather than purely looking at the tax consequences. Seems unlikely to me: if it were true then surely they’d have more lawyers, accountants, and even salesmen on staff than they do tax people… oh, wait…

  5. Pellinor>

    I’m sure there are many plausible reasons unrelated to tax. I just don’t care enough to go and do the research to try and work out what Vodafone might have been up to, so I was hoping someone who has could tell us.

  6. Dave: that’s not the way the law works. We are not guilty until proven innocent and there is no requirement to have any specific kind of motive for setting up a legal company structure. Reducing tax burden by legal means is also not illegal or even (in my opinion) unethical. Why should we give more money to governments to piss away? It’s not as if they wouldn’t run deficits if they had more money

  7. It could have been an Anglo-Irish transfer pricing dispute, resolved by reducing profits in the Irish company (hence the Irish refund) and increasing them in the UK company (so UK corporation tax to pay, probably higher than the Irish rate).

  8. Emil>

    I think you’ve rather misconstrued my comments. No-one, least of all me, said that Vodafone are required to have a reason for what they did. It’s highly likely that they did have a reason, though, rather than merely doing it on a whim, and I wondered what that reason might have been.

  9. “They seem to have been using a single Irish company for licensing IP across the world…”

    Fact is that to run a mobile telecoms company you don’t really need to license any IP – you either know how to run the company or you don’t. But a little bit of intra-group licensing can never hurt and it might save a few tax dollars.

  10. to run a mobile telecoms company you don’t really need to license any IP

    I am sure that must be sarcasm. Because you must, surely, be aware that most major corporations engage in content creation like writing apps; that they have branding to defend; that, especially in the tech biz, they’re generating innovative patentable solutions to common problems; and that they can frequently be found to run research wings investigating issues relevant to their line of business.

    But in case someone else reading this thread thinks major corporations don’t need an intellectual property division, and that setting one up is an obvious tax scam, I hope that settles the matter.

  11. “Fact is that to run a mobile telecoms company you don’t really need to license any IP”.

    A counterexample just off the top of my head: The software that comes with a 3G dongle and enables the user to use the hardware.

    Same software, maybe 50-100 different countries. No point re-inventing that particular wheel 50-100 times. You write the software once, you use it worldwide. Each national subsidiary pays a licence fee to the part of the empire that developed it.

    Now generalise that a bit:
    – The software that generates bills.
    – The software that runs the call centre.
    – The software that makes the base stations work.
    – The software & algorithm that lock a handset to a network.

    Lots of valuable software, lots of multi-country re-use of wheels invented in one country. Lots of scope for cross-border payments, even in the absence of tax issues.

  12. CJ Nerd,

    Alex was saying something pretty silly but fact is that most of that software is not written by Vodafone but by Cisco, Amdocs, Huawei, etc. Still there will be a group benefit since Vodafone group can buy them much cheaper than Vodafone Ireland or Malta could do on their own.

  13. Could well be- so in my post change
    “You write the software once”
    to
    “You purchase the software once”
    and the point still stands.

  14. Emil>

    I really can’t imagine which part of any of my comments here you’re taking to mean that I feel Vodafone, or anyone else, is required to explain anything to me. I simply asked if anyone here knows the answer and wouldn’t mind giving a brief explanation.

    Alex>

    “you either know how to run the company or you don’t.”

    Knowledge of how to run the company, and particularly the systems by which it is run – for example, HR policies or workflow documentation – might be termed ‘business processes’, and would certainly constitute valuable IP. It’s a large part of what franchisers sell, and no-one disputes the validity of their licensing arrangements. I don’t see that it’s any different for such transfers within a multinational. Vodafone is undoubtedly exporting something of value – its way of running a telecoms provider – and investing it in its overseas subsidiary, so it’s perfectly reasonable for them to charge a licensing fee.

  15. Try again

    >Fact is that to run a mobile telecoms company you don’t really need to license any IP – you either know how to run the company or you don’t. But a little bit of intra-group licensing can never hurt and it might save a few tax dollars.

    I know that Vodafone developed its own radio planning tool many years ago. That would have had some IPR if it was used by its overseas investments. I don’t know if they did just giving an example.

    There is an awful lot of periphery stuff like that in the mobile world that could be IPR in a company like Vodafone. They may even have been licensing the Vodafone name. France Telecom makes a fair bit of money licensing the Orange brand.

  16. Gah, I clearly have got stuck in the spam filter. I posted a comment yesterday evening with links demonstrating everything those above just said.

  17. God doesn’t have mօney problems since ңе օwns ɑll of it…so if you’ve got money problems, reality is you’ve got problems with God.

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