Vodafone Loses UK Tax Appeal

by Robin Pilgrim, LawAndTax-News.com, London

28 May 2009

Mobile telecommunications giant Vodafone has suffered a court setback in its bid to avoid a UK back tax bill approaching GBP2bn (USD3.2bn).

The Court of Appeal ruling overturned a decision by the High Court last year that Vodafone does not have to pay UK corporation tax on income attributed to its Luxembourg holding company Vodafone Investments Luxembourg Sarl (VIL).

The case dates back to 2002 after Vodafone set up VIL to dispose of its shares in the German telecommunications group Mannesman, which it acquired in 2000. VIL is also used to circulate cash and profits around the group and as a vehicle to fund other acquisitions.

The case rested upon the court’s interpretation of the UK’s controlled foreign companies (CFC) regulations, which have changed recently as a result of rulings by the European Court of Justice.

The Court of Appeal decided that the UK’s CFC law should be interpreted as if it had a new exception for companies established in the European Economic Area (EEA) which carry on ‘genuine economic activities’ there. This means that the CFC rules will still apply to companies operating outside the EEA and also to EEA companies without genuine economic activities.

However, the court was not required to consider the definition of ‘genuine economic activities’ and tax advisors say that once the basic scope of the law has been decided, this factual issue will then need to be considered.

“This is a common-sense judgment and hopefully will offer a good way forward in CFC cases,” said Bill Dodwell, head of Deloitte’s Tax Policy Group. “However, what we really need is some helpful guidance on the sort of activities that fall within this new exemption.”

The decision means that HM Revenue and Customs can reopen its inquiry into Vodafone’s tax arrangements for the year to March 2001.

HMRC argues that under the UK CFC rules, it has the right to tax the difference between the rate a subsidiary pays in a low tax jurisdiction overseas and the rate it would have paid on that income in the UK - a principle that it attempted to apply in the Vodafone case.

Vodafone is expected to seek leave to appeal against the latest decision in the House of Lords.

Recommended