Tax and total economic contribution
We make a significant economic contribution to public finances in all our countries of operation and are committed to acting with integrity and transparency in all tax matters.
We make a significant economic contribution to public finances in all our countries of operation and are committed to acting with integrity and transparency in all tax matters.
When considering a company’s tax contributions, there are several important factors to take into account.
In many countries and for many companies, corporation tax payments only account for a small proportion of businesses' total tax contribution to national governments. For example, corporation tax accounts for around one-tenth of total tax paid to the UK Exchequer and one-third of total taxes paid to the UK Exchequer by the UK's largest 100 companies1. Businesses also pay a very wide variety of additional taxes: as the Appendix demonstrates, corporation tax is only one of almost 50 different types of taxation paid by Vodafone’s operating businesses every year.
Corporation tax is paid on profits, not on revenues. If a company makes little or no profit – for example, as a consequence of declining sales, competitive market conditions or a period of intense capital investment, particularly if funded through borrowing, it will generally incur lower tax charges than another similar company with higher profits. This approach is common to all countries as without it, companies enduring periods of low profitability would be faced with disproportionate tax demands and significant disincentives for investment in infrastructure. In a number of Vodafone’s markets, including the UK, the cost of acquiring radio spectrum from the government, high operating costs, substantial levels of capital expenditure and sustained competitive and regulatory pressures, have a significantly negative effect on the profits of our local businesses. In addition, in some markets, other taxes that are levied on revenue (together with non-taxation-based contributions such as spectrum fees) have the effect of depressing profit and so reducing corporation tax liabilities.
Taxation is local. Taxes generally fall due wherever profits are generated, and the tax liabilities that arise as a result are decided under the rules of the country that is host to the business in question. So, for example, a company operating in South Africa pays taxes to the South African government under tax rules determined by that country’s government; and a company operating in Italy pays taxes under Italian rules to the Italian government. Vodafone pays all taxes due under the law in all our countries of operation: in 2012/13, these amounted to more than £4 billion. For further details, see ‘Multinationals, governments and tax’.
Taxation is not the only route used by governments to raise revenue from businesses. Governments also use other mechanisms to derive revenues from business activities, including a wide range of licensing regimes, revenue or production-sharing agreements and, for communications companies, radio spectrum fees and auction proceeds. These additional sources of government revenue are often substantial - sometimes exceeding the monies raised through taxation - and represent a critically important contribution to public finances. It is therefore essential to take those government revenue-raising mechanisms into account when assessing the extent to which a company is playing its part in funding wider civil society.
Large companies are an important source of investment and employment. Governments seeking to stimulate investment often develop corporate taxation regimes which are intended to attract the capital necessary to deliver key policy objectives. Those measures also have the effect of stimulating job creation, in turn leading to higher government revenues from employment taxes and increased levels of consumer spending on the part of an expanded workforce. This is particularly relevant when considering multi-billion pound, multi-year programmes to build critical national infrastructure, such as the UK Government’s target for universal broadband coverage by 2015. Political leaders make an active choice to incentivise corporate investment by offering capital allowances – to be offset against future corporate tax liabilities – in order to achieve a wider national benefit that would otherwise have to be funded directly by the state, invariably through public borrowing. These allowances are not ‘loopholes’: they reflect the public policy choices made by governments and also – wholly intentionally – have the effect of reducing tax liabilities for companies whose investment decisions support those policy choices.
Within the European Union and in many other territories, companies have a legal right to set up businesses in different countries and to trade freely across borders. All governments therefore seek to balance the need for tax revenues with the need to encourage companies to do business in and from their jurisdictions, through the development of competitive tax regimes.
Multinational companies choose from a range of locations when setting up certain centralised global operations, such as procurement or IT support. Their decisions are influenced by a wide range of factors beyond the local tax environment, including:
In an international context, various treaties and inter-governmental agreements ensure multinational companies are not subject to ‘double taxation’ by paying tax twice over in two different countries in relation to the same economic activity. Governments also maintain measures that restrict companies from entering into artificial arrangements to move profits from one country to another lower-tax destination. These include requiring multinational companies to apply ‘transfer pricing’ rules to inter-company activities to ensure that profits are allocated to countries where the relevant economic activity takes place. Vodafone does not enter into artificial arrangements – for example, by artificially diverting profits to minimise tax payments to the UK Exchequer - and will only adopt business structures that reflect genuine and substantive commercial and operational activities.
As we explain above, all over the world, governments seeking to encourage companies to create jobs and build infrastructure develop a range of tax incentives to attract new capital investment. The UK is no different.
Vodafone makes huge investments in the UK. We spent over £1 billion a year in 2012/13 – up from £767 million in 2011/12 - building and upgrading the networks relied upon by millions of UK consumers and businesses. We have also paid the UK government more than £7 billion for our UK radio spectrum licences. We raised the money for those licences from UK banks and capital markets, further increasing our overall UK borrowings: we’re now paying more than £600 million a year in interest costs to UK banks and financial institutions.
As the UK Government wants more investment in UK infrastructure and jobs, it allows all businesses to claim relief for the cost of assets used in the business against their profits when determining their corporation tax bills. The government also provides relief to all businesses for the cost of interest on their debts to UK banks and financial institutions. These allowances and reliefs are intentional, long-established and carefully considered: they reflect deliberate policy decisions by successive UK governments and are a cornerstone of UK taxation policy. Vodafone is no different to any other UK business, whatever its size: if a self-employed trader buys a new computer or a large UK business borrows money to build a new warehouse, exactly the same rules apply.
Corporation tax is charged on profits, not revenues. The UK is an expensive and highly competitive country in which to do business and has one of the least-profitable mobile markets anywhere in the world. Many people confuse revenues with profits. However, our UK profit is a small fraction of our gross UK revenues; below £300 million in 2012/13, which is significantly less than the interest costs on our UK debt and just over one-quarter of the amount of our annual UK capital investment programme.
Vodafone's UK corporation tax position is therefore determined by UK capital allowances for UK investment and UK debt interest relief on borrowings from UK banks and financial institutions, set against a (relatively very low) level of UK profit. As we explain earlier, our overseas financing subsidiaries have no bearing on our UK corporation tax position and we do not artificially transfer profits to minimise tax payments to the UK Exchequer.Finally, as explained above, UK corporation tax accounts for a small proportion of the total taxes paid by UK businesses. In 2012/13, we paid the UK government £275 million in direct taxes and, as we show in the table below, our total cash contribution to the UK Government was over £1.8 billion.
We are committed to acting with integrity in all tax matters. We always seek to operate under a policy of full transparency with the tax authorities in all countries in which we operate, disclosing all relevant facts in full, while seeking to build open and honest relationships in our day-to-day interactions with those authorities, in line with our Tax Code of Conduct, which is contained within our Tax Risk Management Strategy (pdf, 514kb).
In forming our own assessment of the taxes legally due for each of our businesses around the world, we follow the principles stated in our publicly available Tax Risk Management Strategy (pdf, 514kb). We have two important objectives: to protect value for our shareholders, in line with our broader fiduciary duties; and to comply fully with all relevant legal and regulatory obligations, in line with our stakeholders’ expectations.
However, tax law is often unclear and subject to a broad range of interpretations. Furthermore, the financial affairs of large multinational corporations are unavoidably complex: we typically process and submit more than 12,000 tax returns to tax authorities around the world every year. The assessment and management of tax uncertainty is therefore a significant challenge for any company of Vodafone’s scale, and the key issues are subject to review by the Board and Audit and Risk Committee.
Our overarching approach is to pursue clarity and predictability on all tax matters wherever feasible. We will only enter into commercial transactions where the associated approach to taxation is justifiable under any reasonable interpretation of the underlying facts, as well as compliant in law and regulation. Our Tax teams around the world are required to operate according to a clearly defined set of behaviours, including acting with integrity and communicating openly. These are aligned with the Vodafone Group Code of Conduct (pdf, 2.26MB) and the values set out in The Vodafone Way.
When governments seek to develop or change tax policy, they invariably seek input from a wide range of interested stakeholders, including business advocacy groups and a large number of individual companies. Vodafone regularly engages with governments – typically through public consultation processes or in our role as a member of an industry group – to provide our perspective on how best to balance the need for government revenues from taxation against the need to ensure sustainable investment.
For example, we are active participants in the tax policy committee of the European Telecommunications Network Operators’ Association (ETNO) and the Groupe Speciale Mobile Association (GSMA), which represent the industry when looking at emerging issues across the EU. In this role, we have shared our insights as a multinational operator with the European Commission Taxation and Customs Union Directorate-General (TAXUD). We are also one of the few companies in Italy to enter into the new co-operation compliance mechanism with the Italian Ministry of Finance.
We contribute to the tax committees of telecommunications industry organisations in Germany, which work on legal developments with tax policy and on tax administration, including the interpretation and application of tax law. In the UK, our Group Chief Financial Officer is a leading industry representative in the Government’s Business Forum on Business Tax and Competitiveness, working to build a more competitive UK tax system. Vodafone also chairs the Finance Committee of the Cellular Operators Association in India and is a member of the South African Institute of Chartered Accountants (SAICA), which engages on a wide range of tax issues.
In December 2013, Vodafone won the PwC Building Public Trust Award 2013 for best Tax Reporting in the FTSE 100. These awards are designed to recognise ‘truly outstanding tax reporting’ and reflect ‘a clear commitment’ by the winning organisations to ‘explain the tax environment in which they operate, as well as offering a detailed explanation of their goals, strategies, policies and wider economic contribution’.
The Indian tax authorities’ actions led to a protracted legal dispute, which culminated in a hearing before the Indian Supreme Court. The Supreme Court examined all the facts related to the transaction before concluding unambiguously and unanimously, in January 2012, that no tax was due. The Court also highlighted that it was important for the Indian Government to avoid penalising international investment in the country.
Although the country’s highest court had vindicated Vodafone’s position, the Indian Government subsequently changed the law to introduce retrospective taxation rules. Those rules, which were back-dated to 1962, were designed to require taxes to be paid retrospectively which, as the Supreme Court had concluded, could not be levied against Vodafone under any reasonable interpretation of the evidence or the law.
All businesses depend on tax policy predictability and certainty in order to plan investments for the long term. The Indian Government’s decision to rewrite half a century of tax legislation with immediate retrospective effect was widely condemned worldwide, greatly damaged global business confidence in the Indian Government and led to a marked reduction in the flow of investment into the country.
As a result, the Indian Government commissioned an independent inquiry, led by the economist Parthasarathi Shome, to recommend a way forward. The Shome Committee concluded that retrospective tax rules should be introduced only in the ‘rarest of rare’ cases, and that, if applied to capital gains tax cases, the authorities should pursue the seller, not the buyer (Vodafone being the latter not the former in the case at issue).
While we maintain that no tax is due on the 2007 acquisition, we have informed the Indian Government that as a committed long-term investor in India, we are willing to explore the possibility of a mutually acceptable solution. We continue to have constructive discussions with the Indian Government regarding options for conciliation and have made it clear that any solution would need to be comprehensive in resolving the core of the dispute.Over the last five years, Vodafone has become one of India’s largest investors: we have spent more than £12.8 billion in building our business in the country since 2007. We are also one of the country’s largest taxpayers: as we set out under our country-by-country total contribution table, in 2012/13 our direct and indirect contributions to Indian public finances exceeded £1.7 billion.
In 2010, Vodafone and Her Majesty's Revenue and Customs (HMRC) concluded a long-running legal dispute, focused on a specific point of UK and European tax legislation, with a full and final settlement of £1.25 billion.
The background to this settlement is highly complex. It was focused on an area of law whose application was unclear, and which successive UK governments agreed needed to be rewritten. It involved nine years of legal argument, three court cases and two independent appeals, followed by a detailed HMRC review and settlement in 2010. That settlement was then followed by a National Audit Office (NAO) inquiry in 2012, assisted by a former High Court judge, Sir Andrew Park. The NAO report concluded that the HMRC/Vodafone settlement was a good outcome for the UK taxpayer and that if Vodafone had chosen to continue litigation instead of settling with HMRC “there was a substantial risk that the Department [HMRC] would have received nothing”.
The dispute focused on the UK tax authorities’ interpretation of Controlled Foreign Companies (CFC) legislation and began when Vodafone bought the Mannesmann conglomerate in Germany in 2000. This was an all-share transaction involving no borrowings or loans from Vodafone’s UK business. Importantly, there was no reduction in Vodafone’s UK tax contributions as a consequence, and the dispute was not related in any way to the tax liabilities arising from our UK operations. We therefore questioned the UK tax authorities’ application of the rules on both factual and legal grounds, in common with a number of other companies who had also challenged the UK’s approach to CFC legislation.
As explained below, Vodafone’s subsidiary in Luxembourg is the main financing company for our many operations around the world. The UK tax authorities argued that, had those financing activities been established and undertaken in the UK, they would have attracted tax in the UK, and that therefore tax should be payable under UK CFC provisions. Vodafone argued that, as a matter of European law, we were freely entitled to establish activities wherever we chose, and that as a matter of fact, these were neither artificial arrangements nor did they have any impact on Vodafone’s UK tax liabilities.The underlying facts were scrutinised by the UK tax authorities and the points of law involved were examined in detail by the European Court of Justice, the UK High Court and the UK Court of Appeal, prior to the decision to reach a settlement. Subsequently, the UK Government sought to address a number of inconsistencies and flaws in UK CFC legislation, clarifying the UK’s approach to this complex area of international taxation in new rules, which took effect in January 2013.
Vodafone has a long-established and significant presence in Luxembourg. Our subsidiaries in that country manage the financing of many of the Group’s international operating activities. In addition, the Group’s global supplier contractual relationships are determined and controlled by our Luxembourg-based Vodafone Procurement Company, and our international roaming team is also based in the country.
These are not ‘brass plate’ activities. Luxembourg is an attractive EU location for substantive business operations, which, in Vodafone’s case, employ more than 300 people and coordinate and manage more than €7 billion of global purchasing and 650 international roaming agreements that enable Vodafone customers to communicate when travelling across more than 190 countries. Furthermore, and in line with international best practice, our Luxembourg subsidiary oversees the provision of financing to Vodafone’s international businesses on a commercial ‘arm’s length’ basis, reflecting the costs of borrowing from an external bank.
The Luxembourg tax regime is largely in line with that of many other EU member states, including a standard corporate tax rate of 29.22%. However, there is one important difference: under Luxembourg tax rules, write-downs on the book value of a company’s assets are recognised as tax losses to be offset against company profits.
Those rules mirrored similar rules in place in Germany 13 years ago. When Vodafone’s acquisition of the Mannesmann conglomerate in Germany in 2000 was followed by the dotcom crash, tens of billions of Euros were wiped off the value of the former Mannesmann business, resulting in significant losses for the Luxembourg subsidiary involved and ultimately for all of Vodafone’s shareholders.
Those historical losses more than offset our income in Luxembourg, leading to a low cash tax rate in that country. It is those losses which give rise to the £17.7 billion additional tax asset announced in our recent interim results. However, it is important to note that changes to the UK Controlled Foreign Company (CFC) rules introduced in 2013 mean that a proportion of profits from our Luxembourg subsidiary’s global financing activities are also taxable in the UK.
In September 2013, we announced our intention to sell the US group, whose principal asset is Vodafone’s 45% shareholding in Verizon Wireless, to our US joint venture partners, Verizon Communications Inc., for a total consideration of $130 billion.
Our US group structure is predominantly a legacy of prior mergers and acquisitions dating back more than 14 years. Together with our Verizon Wireless shareholding, it also owns a range of minority non-US interests acquired in the merger with AirTouch Communications Inc. in 1999, together with other non-US interests acquired over time.
We will be exiting our principal US business as a result of the transaction, and it would not make sense to leave these legacy non-US interests – which are not included in the sale to Verizon Communications – stranded in US jurisdiction. We will therefore undertake a rationalisation and reorganisation prior to completion of the transaction to ensure these non-US interests will be held by Vodafone outside the US in the future. That reorganisation will give rise to an estimated $5 billion US tax liability under standard US tax rules. The amount to be paid to the US Treasury in due course will depend on the valuation of those non-US interests when the transaction completes in the first quarter of 2014.
Our US group has always been owned by one of Vodafone’s European holding companies, based in the Netherlands, which also owns many of our other international assets. Our European holding company will sell the US group to Verizon Communications in its entirety once the rationalisation and reorganisation, described above, has been completed.
The sale of our US group is not taxable under standard US tax rules: under the US tax code, US tax is not imposed on these types of sales of shares by non-US-based entities. Such treatment is also consistent with US tax treaties. The sale is also not taxable under standard Dutch rules: long-established tax law in the Netherlands provides a participation exemption on dividends received and capital gains arising from the sale of shares by any Dutch company, whatever their size or the size of the transaction involved.
Whilst the UK is not a relevant jurisdiction for tax purposes, given the locations of the buyer and the seller, under rules established in 2002, the UK has similar shareholding disposal exemptions to those of the Netherlands.
A number of other EU countries have similar provisions in place, all of which are designed to stimulate long-term corporate investment and consequential broader benefits for the wider economy.