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.