This is interesting about Vodafone and that £6 billion

Well, happy 40th birthday ActionAid. Beginning as a small London-based child sponsorship initiative, my former employer had grown into a truly global federation of development organisations. Form follows function, and the brilliant decision to relegate ActionAid’s UK office from headquarters to one member of a federation with the same number of votes as, say, ActionAid Malawi is indicative of the radical politics that are rare in an organisation of ActionAid’s size. I don’t think any other organisation could run a campaign quite like it does on tax justice, something that I’m proud to have been part of.

One of the stand-out moments from my time as ActionAid UK’s tax justice policy adviser was a week of meetings with tax officials in Accra alongside journalist Richard Brooks and ActionAid Ghana’s finance director Emmanuel Budo-Addo, while researching our report into brewing giant SABMiller. Brooks is a former UK transfer pricing official and had plenty of questions ready, but so too did Addo, who had his own experience of the Ghanaian approach to transfer pricing from his time in the private sector. A great learning experience for me!

The journalist Richard Brooks is the Private Eye bloke who made up out of whole cloth the £6 billion number for Vodafone. Isn\’t it interesting to see that he\’s associated with this sort of campaign. Even before coming up with such a ludicrous number.

BTW, yes, I have been in correspondence with Brooks and yes, he really did make up the number.

There are really two things to this story.

1) Controlled Foreign Corporation (CFC) rules. If you\’re a UK company and you\’ve got a subsidiary offshore, then (OK, at the time this was true, isn\’t now) you have to pay UK tax on the profits you make there. Even if you leave them there: if you bring them into the UK, in order to pay a dividend for example, then you definitely pay UK tax on them.

Except, the EU has a different set of rules. And that\’s what the actual court argument was all about. EU law trumps UK law and so on. And given that the subsidiary was in Luxembourg (and for these purposes, EEA countries like Switzerland are included) then EU law should prevail. And the EU bit is that if the profits stay in Luxembourg then they are not subject to UK tax. If they are brought into the UK then they are.

So, that\’s the first part, that\’s what the actual legal argument was all about.

2) How much UK tax would you have to pay if you had to pay any? As the system works, you calculate your UK tax bill the usual way then subtract what you\’ve already paid to Johnny Foreigner. Obviously: otherwise you could be taxed two, three, four times on the same profits. But here\’s what Brooks did. He looked at the total amount in Luxembourg then applied the UK tax rate to it. Forgetting (or ignoring, your choice) that corporate profits and or dividends would be taxed in Germany as they are earned. And interest income (the pot in Luxembourg was made up of both) in Luxembourg.

Which is how he got to £6 billion. Resolutely missing the point that this money had already paid some amount of tax and not deducting that amount from whatever the UK tax bill might be: if one was due.

Entirely nonsense of course.

Even if Vodafone had lost on point 1 then even then the tax bill would not have been £6 billion. It would have been that minus whatever it was that had already been paid in tax on that sum. The best guess being that this would be around and about the £2.2 billion or so that Vodafone had as a provision in its accounts.

All of which makes his previous links to global tax campaigners rather interesting really, doesn\’t it? There\’s almost a hint of a soupcon of a suspicion that he ginned up his number to give people something to get angry about and get the Teenage Trots marching in the streets. Of course, that\’s not actually what he did for no responsible journalist would do such a thing. Aver as fact something they knew to be incorrect.

All of which brings us to the really interesting part about the outcome of this whole thing. What actually was the settlement between HMRC (or Hartnett, if you run to conspiracy theories) and Vodafone? Well, basically, Vodafone agreed to bring some of that Luxembourg money onshore to pay dividends. And everyone agrees, all along the line, that this would be taxed at the difference between the UK rate and the tax that had already been paid on it.

Another way of saying the same thing is that HMRC knew it was on a very sticky wicket indeed and didn\’t think that the Court of Appeal ruling would stand if the fight went on any longer. And they weren\’t willing to take the risk given that there are reports of there being some 100 other companies wanting to make the same arguments. About the CFC and EU law that is.

So, by agreement, Vodafone took action that would subject the money, or at least some of it, to UK taxation. Faces saved all around. And money for the Treasury, law upheld and so on.

The also answers why they were given time to pay some of that tax. They didn\’t bring it all back in one year. They left some of it in Luxembourg and agreed that they\’d bring it back in a later tax year. At which point it would be righteously liable to UK tax and they would pay UK tax on it.

And isn\’t all of that interesting? That the story started with someone who is involved with Ritchie Murphy (for yes, Ritchie has been involved in the Action Aid stuff).

Aren\’t we lucky to live in a country where political campaigners tell us the truth and nothing but the truth all the time?

Update: And Richard Brooks writes in to say, among other things, the following:

No problem with your continued criticism, but I think it would be fair for you to correct your misunderstanding as to what Luxembourg profits we are talking about as potentially caught by the CFC rules. To repeat – it is not the distribution of German profits as you seem to think.

7 thoughts on “This is interesting about Vodafone and that £6 billion”

  1. Which is why I see this in terms of a narrative that’s being cooked up across a spectrum of self described progressives & a spectrum of causes. CAGW’s a thread of it. This is another. Conspiracy theory? Some times it is. The UEA e-mails certainly reveal something going on. The above post implies collusion.
    But I see the narratives self generating out of the sort of people who propagate them. Starts with that 60s thing about facts being subjective rather than objective. With a little help from those disinformation(how to propagate it) courses some of them attended in back rooms paid for from funds nothing to do with Moscow whatsover. Someone writes or says something supports the ’cause’. Conformation bias means none of them are bothered to question it so it becomes a ‘fact’. Whether it is or not doesn’t really matter. Then someone else contributes something supports it. Takes it further. Every ‘fact’ gets cross-confirmed with other ‘facts’ until there’s a whole narrative with its own internal logic. Anyone can add to it. It reads like a story with villains & heroes. It’s mythology but very persuasive.
    It’s also very hard to argue against. You can see the problem here. Tim’ll expose some complete fallacy like the Green’s supposed tax evasion. The contrary comments are mostly along the lines of “They must be evading tax because….because…they’re evading tax. They’re evil rich people!”
    The Vodafone tax evasion is now part of the narrative. Whether any tax was evaded or not is immaterial.

  2. From Richard Brooks, Private Eye.
    The analysis here is completely wrong. The Luxembourg income potentially subject to CFC laws that would have produced the very large bill is interest income, NOT dividends distributed by Vodafone companies to Luxembourg. There is no underlying foreign tax to credit against it, so nothing for me to have ignored, whether in error or deliberately to get the ‘teenage trots’ on the streets. I have made this clear in the articles I have written. I have shown Tim the evidence and asked him to correct this basic error.

  3. On the Vodafone case from that NAO report released back in June:

    48 The main tax issue was whether the controlled foreign companies provisions applied to subsidiary D. If so, then company D would be subject to UK tax on subsidiary D’s profits, the most significant part of which were the interest payments received from subsidiary DD.

    Vodafone (company D) has a subsidiary (subsidiary D) which in turn has a subsidiary (subsidiary DD). Both subsidiaries are based outside of the UK. Subsidiary DD pays billions of Euros in interest payments to subsidiary D as one of the outcomes of the acquisition of subsidiary DD. HMRC believed that subsidiary D’s profits can be taxed in the UK. Vodafone disagreed:

    …it argued that, because subsidiary D was incorporated in an EC member state, the freedom of establishment articles in the EC Treaty prohibited the use of the controlled foreign companies provisions by the UK.

    In a nutshell, Vodafone’s argument is that EU rules override UK law in this instance.

    Despite having a decision in their favour on the application of the controlled foreign companies (CFC) laws overturned in the Court of Appeal, Vodafone still had two defences – first, the “motive” test, i.e. that there is genuine economic activity going on in the subsidiary rather than it existing only as an artificial arrangement for tax avoidance, and second, that this case doesn’t fall under the limited circumstances when the CFC laws can be applied as set out by the ECJ in the judgement of the Cadbury Schweppes case.

    Rather than take it to litigation, an attempt was made to settle the case which ended up with Vodafone paying over £1B to HMRC.

    The view taken was Vodafone would probably have won and ended up with zero liability if litigated.

  4. “The analysis here is completely wrong. The Luxembourg income potentially subject to CFC laws that would have produced the very large bill is interest income, NOT dividends distributed by Vodafone companies to Luxembourg. ”

    This is not true.

    While the income stream that was used for the HMRC challenge in the High Court was the interest income – because that was where HMRC’s best claim lay – this was a comparitively small amount. To get to the £6 billion number thrown around by Private Eye and UK Uncut, you have to include all the dividends paid to Luxembourg.

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