So Vodafone Didn\’t Do Any Tax Avoidance Says Murphy

That’s not bad, but I prefer to compare tax avoidance, which is hard to define, with tax compliance which I find easier to define. 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.

In that case tax avoidance happens whenever someone chooses a course of action which results in the wrong amount of tax being paid, in the wrong place and at the wrong time.

The UK Uncut/Private Eye thing about Vodafone was that UK corporation tax had not been paid on profits made in Germany on selling phones to Germans from German shops. Given that the economic substance of this activity was in Germany then whatever tax the Germans wished to charge on this activity was the correct amount of tax to pay.

Thus Vodafone did not indulge in any tax avoidance.

19 thoughts on “So Vodafone Didn\’t Do Any Tax Avoidance Says Murphy”

  1. Vodafone did avoid German tax (by minimising the German subsidiary’s profits via the interest it had to pay on loans from Vodafone’s tax haven subsidiaries). That was the whole point of the scheme.

  2. And I avoided German tax on the goods I bought from a German company by not living in Germany. It’s a fair cop, guv, you’ve got me bang to rights.

  3. Eh? Vodafone made lots of money selling phone subscriptions to Germans. Without the avoidance schemes that Vodafone uses, this profit would have been taxed by the German taxman.

    Instead, Vodafone’s tax haven subsidiaries lent lots of money to Vodafone Germany, so that instead of making a large profit, the German company made a smaller one because of all the interest it was paying to the companies in the tax havens. And therefore, it had to pay less money to the German taxman.

    That’s not the same thing as avoiding German tax by not being in Germany. It’s more like avoiding German tax while living in Germany because you also have a flat in the Cayman Islands that you’ve never been to but that you pretend is your primary address.

  4. johnb (#3), but interest is only deductible if the loan is for business reasons and the interest rate is commercial.

    So if they needed that capital to make those profits in Germany, there was never going to be lots of profit without the loan interest.

  5. Richard: you’re confusing “should be” and “is”. That’s why there are tens of thousands of tax accountants making a decent living on structuring this kind of transaction in London alone.

  6. Richard: you’re confusing “should be” and “is”. That’s why there are tens of thousands of tax accountants making a decent living on structuring this kind of transaction in London alone.

    At which point we ask for evidence that the loans were not required and were merely a sham, and it all goes strangely quiet.

  7. The loans are definitionally not required, because they’re *within the same company*.

    If I need to invest a million quid in my business, and I don’t have a million quid, then I need to borrow a million quid.

    If I need to invest a million quid in my business, and I do have a million quid, then the way I do that (if not playing ropy tax-dodging games) is to invest a million quid in my business.

    The way I do that is not, under any circumstances, to set up a shell company in a tax haven, transfer my million quid to the tax haven shell company, and then have my business borrow a million quid from my shell company.

    The only reason to do that, rather than to invest the money into my business, is in order to avoid tax.

  8. Vodafone plc is liable to tax on group profits less losses less allowable losses brought forward. It’s tax planning using a subsidiary in Luxembourg (which john b calls a tax haven) is to reduce the amount of double taxation and to utilise its massive accumulated losses. It still pays more than the standard UK rate of tax on its profits – Murphy seems to think it should pay more than twice that which contradicts his claim that he wants everyone to pay the right amount of tax.

  9. John B – you have stated how you would not struture the transaction. but how would you structure the transaction? Would your aim be to minimise the amount of tax you pay as a group or to maximise the amount of tax you pay and what criteria would you use to determine the “best” structure?

  10. The loans are definitionally not required, because they’re *within the same company*.

    Firstly, are they the same company? Sure, they are under the same group of companies but I’m reasonably sure that they are quite separate legal entities. So the analogy about you paying for your own business falls apart.

    Secondly, you seem to think that no company would lend to a company in the same group for reasons other than tax avoidance. I am somewhat doubtful that this is correct.

  11. john b (#7), the loans are between different companies within a group.

    When you lend money from one company to another, commercial prudence and law (creditor protection as well as tax) says that you should charge a proper commercial rate of interest.

    To lend interest-free, as you suggest, would be abusive transfer pricing and may (if bits of the group go bust) disadvantage creditors of the lending company.

  12. john77:
    1) the UK has a double-taxation treaty with Germany. The use of tax haven subsidiaries is not required in order to avoid double-taxation on the profits of a German subsidiary of a UK company.
    2) The company pays more than the standard UK rate on total profits because it has chosen to operate in markets (such as the US and India) where corporation tax is higher than the UK rate.

    Tim N: yes, of course they’re separate legal entities – but they’re under common ownership and control. Just as I’m the sole shareholder in the limited company that is my business, and would presumably be the sole shareholder in the tax haven entity I’d set up in the hypothetical case.

    Diogenes: I’d put the money into the business in exchange for equity, in very much the way that businesses have been funded by their owners since long before limited liability companies even existed.

    Richard: it’s the fact of lending the money that I’m questioning. Should be equity.

  13. Just as I’m the sole shareholder in the limited company that is my business, and would presumably be the sole shareholder in the tax haven entity I’d set up in the hypothetical case.

    Right, so you think all your money should sit in one business as cash? Not in business, are you john?

    And you’re still labouring under the impression that subsidiaries only lend each other money for the purposes of tax avoidance, which is bollocks.

    Here’s an example. I don’t know about Vodafone Germany, can’t find their ownership structure easily on Google, but a lot of foreign subsidiaries of multinationals are not wholly owned by the parent company, they often have a local (or other) 3rd party owning a portion of the shares of subsidiary. So if the parent company wants to invest they do not merely transfer $10m to the subsidiary’s accounts as that would effectively hand over the sum to the partial control of another company (something foreign companies in Russia discovered is a very bad idea). So the transfer becomes a loan, which must be repaid by the recipient subsidiary, and therefore cannot merely be pissed up against the wall on management dachas without consequences. This is just one example, I am sure there are several sound business reasons unrelated to tax why Vodafone Germany would be receiving loans from another subsidiary.

  14. I’d put the money into the business in exchange for equity, in very much the way that businesses have been funded by their owners since long before limited liability companies even existed.

    This isn’t likely to be a risk with Vodafone Germany, but if you did that in Russia your business would be gone by morning.

  15. john b (#12), why the hell should it be equity?

    Debt and equity are two alternative ways of funding a business, and different businesses choose one or the other for a whole range of reasons.

    If Vodafone Germany needed to raise capital from outside the group, which would they choose? Probably debt, if it was available on reasonable terms.

    So if they are getting capital from other group companies, the arm’s length principle says that they should do the same as they would have done with a third party.

  16. Tim, I’m in business. The 100%-owned limited company isn’t a philosophical construct, it’s located in the office 20 metres to my left. It, and I, don’t have a million quid.

    “I don’t know about Vodafone Germany” is quite an important disclaimer. It’s wholly owned. All these companies are wholly owned. If they weren’t, then I agree that all kinds of shenanigans might be relevant or appropriate or sensible. But all these companies have Vodafone Group Plc as their ultimate 100% shareholder.

    I absolutely agree that if I wanted to put some money into Russia then I’d see a psychiatrist, because that’d be cheaper than doing so. But I’m sceptical that in a kleptocracy, debt is appreciably safer than equity (and I know I’m over-conservative here: despite the car-crash that is TNK-BP, even on the worst estimates when it’s forced to sell up to cronies for no takeover premium, BP is going to have ended up making an immense return on its original investment ).

  17. “I don’t know about Vodafone Germany” is quite an important disclaimer.

    Yes, one I freely admit. Whereas you seem to think you know enough detail of their structure and operations to declare confidently that the only reason for Vodafone Germany to receive loans from another subsidiary is to dodge taxes.

    You have no evidence of this whatsoever, but asked me to come up with a possible reason why the subsidiary of a company might lend to another subsidiary and I did. Like I said, it probably doesn’t apply in this case, but my point was only to demonstrate that loans between subsidiaries is done for reasons other than tax avoidance.

  18. But I’m sceptical that in a kleptocracy, debt is appreciably safer than equity…

    My point was more that lending to a Russian company (with the implication you want the money back) is a lot safer than transferring money into the company’s accounts as if it was company money (and therefore available to the directors to spend on Porsche Cayennes).

  19. @ john b
    Lefties habitually answer comments that I have not made to avoid admitting that what I actually did say is true.
    A double taxation treaty does not transfer tax losses, it merely means that you do only pay tax at the higher of the two tax rates rather than the sum of the two tax rates if a resident of one country receives income from the other.
    Incidentally, Vodafone’s Luxembourg subsidiary is liable to pay tax in Luxembourg on the interest @21% plus a municipal tax that varies between municipalities, compared to 10%/12.5% for Ireland. The reason for choosing Luxembourg was not simply the slightly lower tax rate than Germany.

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