Many governments purposefully shape their taxation policies in order to compete with other countries to attract international businesses and capital, and stimulate economic activity, job creation and skills development.
Governments also use tax rules to incentivise (or disincentivise, in the case of health or the environment) a wide range of activities and behaviours across society as a whole. However, competition between countries can lead to complexity in the tax systems that apply to companies operating in, and across, multiple jurisdictions. Some of the complexities companies experience when conducting business across multiple countries include:
Governments enter into pan-regional and bilateral cooperation agreements to enable companies to establish operations in different countries and operate and trade across borders with as few impediments as possible. Multinational companies such as Vodafone operate in an international taxation environment that in some respects is determined by governments working multilaterally although, more often, it is shaped by countries operating unilaterally, resulting in complexity and issues including double taxation.
Inter-governmental agreements have been created with the aim of ensuring multinational companies do not pay tax twice in two different countries in relation to the same economic activity. However, there is immense complexity within these arrangements that can lead to disagreements between governments on both policy and practical implementation matters, as well as between companies and governments. In international taxation disputes of this kind, there is often not a ‘right’ answer. There are, instead, different perspectives on the correct interpretation, with some disputes (and the associated litigation) running for a number of years.
Many governments have established measures to restrict companies from entering into artificial arrangements intended to move profits from one higher-tax jurisdiction to another lower-tax destination. We support government action to block these artificial arrangements. Without decisive intervention, aggressive avoidance of this kind would threaten to undermine the integrity of international taxation norms, with unpredictable consequences for the global economy as a whole.
These kinds of arrangements are explicitly prohibited under our Tax Principles. The majority of our businesses are licensed on a national basis and run by companies incorporated and taxed in the same jurisdiction as our customers. Our Principles clearly state that ‘we will only adopt business structures that reflect genuine and substantive commercial and operational activities’. This means that our corporate tax liabilities are paid in the country in which the relevant economic activities take place, exactly the outcome that governments are seeking to deliver through their measures to address artificiality.
Determining the location for centralised operations
As an international business, Vodafone – in common with all multinational companies – can choose from a range of locations when setting up certain centralised global operations, such as procurement or customer or IT support.
We consider a wide range of factors beyond the local tax environment when determining the location for a business operation, including:
- the stability and predictability of the political, regulatory and social environment (including respect for the rule of law and compliance with international human rights conventions)
- the availability of relevant skills within the local labour force, together with labour costs and the overall cost of operations
- the effectiveness of transport links
- the quality and reliability of communication networks
- the range and cost of commercial real estate
We focus on selecting locations that are most logical from an operational and strategic perspective. While the local tax environment is taken into account, we do not choose locations on the basis of tax arrangements that would lead to those activities being based in countries that may offer an attractive tax regime but would be impractical in other respects. Doing so would amount to artificiality and would be at odds with our Tax Principles.
Multinational companies often develop specialist global teams within dedicated legal entities that are located in a small number of places to most efficiently service the needs of multiple business units across different countries. There are strong financial, operational and strategic reasons to take this approach. Global centres of excellence enable a multinational company’s worldwide subsidiaries to access world-class expertise quickly and efficiently, reducing overall costs for the company as a whole and greatly benefiting subsidiaries in smaller and less developed countries with few or no local alternatives.
However, these global centres are not ‘free’ from an individual subsidiary’s perspective. They cost money to run: there are premises, salaries, R&D and third-party costs to be paid. OECD Transfer Pricing Guidelines, which are often enshrined in domestic tax law, recommend that these centres of excellence should be remunerated for the services they perform as if they were independent businesses. Multinational companies therefore establish internal charging mechanisms to ensure that the individual business units and local country subsidiaries that use these centralised services pay a representative price for them.
The internal charging mechanisms involved are known as ‘transfer pricing’. Governments and tax authorities pay close attention to how companies implement transfer pricing arrangements in order to ensure that profits are appropriately allocated to the jurisdictions where the relevant economic activity takes place.
We follow the OECD best-practice guidelines when agreeing prices for the provision of such (intra-company) services in order to ensure that we follow best international practice. For example, the intellectual property (IP) associated with the Vodafone brand is held in the UK, and the team of brand and marketing professionals responsible for the strategic international development and deployment of the Vodafone brand is also based in London. The IP transfer pricing arrangements in place ensure our subsidiaries pay an arm’s-length, externally benchmarked and verified royalty fee to our UK-based Group entity for the use of the Vodafone brand.
In addition to the Brand team, Vodafone operates other global centres of excellence, with major hubs in nine countries,– each of which fulfils a number of specialist roles supporting our operating companies. We have established international IT and back office support hubs in countries including Egypt, Germany, Hungary, India, Ireland, Romania and the UK, and we provide insurance services from our regulated businesses in Malta. All of our Luxembourg subsidiaries also operate under the same rules and further details on the activities in this country can be found in our Report. All these services are provided on transparent and commercially validated market terms, and all of our subsidiaries (both those that offer these services and those that benefit from them) comply in full with local tax rules on transfer pricing.
Developing tax regimes for the digital age
There continues to be ongoing political and technical debate on digital taxation, specifically focused on the development of new tax rules targeting technology companies that have little or no physical presence in a country but generate profits, usually, through large numbers of local online customers.