London - The world’s largest mobile phone company, Vodafone
Group, has shaved £1bn, and possibly more, off the taxes its UK operating unit
might have paid in the past decade, thanks to accounting factors not seen at
other European units.
A Reuters examination of statutory filings made by Vodafone
across Europe over the past 16 years shows the UK taxman has often gone empty-handed, while tax authorities in Germany, Spain and elsewhere have raked in
billions of euros.
Indeed, rather than incurring UK tax in recent years,
Vodafone has racked up tax credits such that it may not have to pay any tax on
its UK operations for the foreseeable future.
Vodafone’s low UK tax bill is in spite of soaring revenues
here and the fact that chief executive Vittorio Colao has repeatedly told
investors that Britain was one of the group’s stronger performing markets.
“This is yet another tax scandal,” said Member of Parliament
Margaret Hodge, chair of the parliamentary Public Accounts Committee, which
scrutinises public expenditure and revenue-raising.
“It may be legal, but it’s completely immoral. They make
money out of Britain, and they should put money back into Britain.”
Vodafone declined to answer most questions about its
accounts, citing commercial sensitivity. It said it was committed to acting
with integrity and transparency in all tax matters, while also having a
responsibility to shareholders to control tax costs.
There is no suggestion the company has behaved unlawfully,
and arranging its affairs in a tax-efficient manner within the law is standard
“Paying more than was required would be a dereliction of
duty to shareholders,” said Robin Bienenstock, research analyst at Sanford C
Bernstein in London.
The British tax authorities, which lawmakers last year
accused of being “too cosy” with big business, the Treasury and Vodafone Limited’s auditor Deloitte, said they could not comment on individual companies’
Tax avoidance is already at the top of the political agenda
in the UK; last week Prime Minister David Cameron said popular comedian Jimmy
Carr was “morally wrong” to shelter £3.3m of income from tax by using an
apparently legal tax avoidance scheme.
Tax campaigners say the tough approach to individuals
avoiding tax contrasts with a lax approach toward corporations doing the
How do they do it?
Between 1998 and 2003, Vodafone’s UK unit, Vodafone Ltd,
made annual profits of around £530m and paid taxes of around £170m each year,
its accounts show.
While revenues have soared since 2003, reported profits have
plunged. In the past three years, the UK unit has racked up losses in excess of
£100m each year.
The profit collapse is tied to two factors, the accounts
In 2001, Vodafone limited began making large interest
payments on money it borrowed from companies within the Vodafone group.
In the 10 most recent years for which accounts have been
published, Vodafone paid associated companies £3.3bn in interest.
This reduced the UK unit’s taxable profits by a commensurate
amount because interest payments are tax deductible.
Using the prevailing corporation tax rates at the time, this
translated to savings worth £961m to Vodafone, either in reduced taxes, or by
generating tax credits that could be used to offset future profits.
Tax experts say there have been cases where UK companies
have established units in Luxembourg, which then lend the money back to UK
units, as a tax avoidance mechanism.
This reduces profit in the UK, where corporate profits are
taxed at 24% - down from 30% a few years ago - while generating profits in
Luxembourg, where financial profits can be taxed at rates under 1%.
Vodafone has a Luxembourg-based unit, Vodafone Investments
Luxembourg S.a.r.l., which it says on its website was “established as the main
financing company for our many operations around the world”.
A spokesperson said Vodafone Limited’s interest payments
were to other UK-based units of Vodafone but declined to say whether these
units had in turn borrowed the money from Vodafone Investments Luxembourg.
The dramatic rise in inter-company interest payments seen at
the UK unit is not reflected at other Vodafone units in Europe.
Vodafone D2 GmbH, the phone giant’s Duesseldorf-based German
unit, paid less than €2m in interest to affiliated companies in the year to
March 2011, the most recent year for which accounts are available. Vodafone
Espana paid €43m in interest to group companies in that year.
Accounts for the holding company for the Italian operations
do not break down interest payments between affiliated and non-affiliated
companies but do not show any significant rise in overall interest payments
Soaring costs of goods
The other main reason behind Vodafone Limited’s swing to
reported losses was an increase in the price its UK unit pays for the mobile
phones and connection services it sells on to consumers. In 2002-2004, the "costs of goods sold" represented around 55% of turnover.
In the past three years, reported costs of goods sold have
averaged 76% of turnover, squeezing Vodafone’s income.
Vodafone said in an emailed statement that the “extremely
competitive commercial environment in the UK” had affected margins.
A narrowing gap between revenues and cost of goods sold can
reflect increased competition, whereby companies struggle to pass on cost
increases to consumers via higher prices.
However, transcripts of conference calls with analysts CEO Colao or chief financial officer Andy Halford host each quarter on the
release of earnings results show the company has warned for several years that
its margins across all European markets were under constant pressure.
The UK was not singled out as a market that suffered an
exceptional increase in margin pressure.
In Germany, where Vodafone says call costs are at the
European average or below, the cost of goods sold has not risen dramatically as
a percentage of turnover, and averaged 57% in the two most recent years for
which accounts are available.
“This suggests there is some very odd pricing going on into
Vodafone UK,” tax campaigner Richard Murphy said.
At Spanish group Telefonica’s UK division, O2, cost of goods
sold has remained constant at around 58% in financial statements for 2007 to
2010, the last four years for which accounts are available.
This allowed O2 to generate profits of £788m in 2010, on
which it paid tax of £189m.
Had Vodafone’s cost of goods sold in the UK since 2003
averaged the same level as the German unit experienced in recent years, the
unit’s profits could have been £4.7bn higher, and it could have incurred
an additional £1.4bn in tax, according to Reuters calculations based on the
By massaging the prices group companies charge each other
for goods and services, multinationals can shift profits from high-tax to
This technique, known as “transfer pricing”, typically
involves a group company in a low-tax regime selling goods above market price
to an affiliate in a higher tax regime.
Tax authorities around the world keep a sharp eye out for
transfer pricing abuses, but it can be hard to spot.
Vodafone declined to say why costs of goods sold as a
percentage of UK turnover rose so sharply.
It said the absence of a UK income tax charge for Vodafone
Group in the year to March 2012 was due to high capital allowances and high
external interest charges, rather than transfer pricing adjustments.
It also cited the high cost of purchasing a UK 3G phone
licence in 2000. UK profits were indeed hit by a depreciation charge on
licences of £333m last year. However, in the profitable German unit, the charge
At Vodafone Germany and Spain, the lower cost of goods sold
and absence of big inter-company interest payments explain their high
profitability - and the high taxes paid in those countries.
Vodafone’s German unit incurred corporate taxes of €3.14bn
from 2007 to 2011. Between 2008 and 2010, the Spanish unit paid almost €900m.
In 2011 alone, corporate income taxes payable by the holding company for the
Italian unit were €721m.
A vibrant loss-maker
Vodafone Limited has racked up so many losses in recent
years and its reported profitability has declined so much that it has even
written off previously accrued tax losses, as it no longer expects to have
enough future profits to absorb them.
Yet the ostensibly parlous state of the UK unit’s finances
is in sharp contrast to comments from the company to investors and analysts
over the past few years.
The company’s most recent annual report said the UK
“performed well” last year.
“(Group) Service revenue declined by 0.4%, reflecting
reductions in most markets offset by growth in Germany, the UK, the Netherlands
and Turkey,” the report said.
In every quarterly analyst call bar one since May 2010,
Colao and Halford have praised the UK as one of the group’s stronger markets.
Another factor of which they regularly boast in these calls
is Vodafone’s proactive approach to managing its tax affairs.
In 2002 and 2003 the company paid an effective tax rate of
36%. It said it brought this down to 25% last year, a level it has told analysts
it expects to maintain in the coming years.
This drop came about even before the UK began cutting
corporate taxes, and rather reflects diligent planning.
“Without further tax planning... over the next few years, the underlying
adjusted effective tax rate will be in the mid-30s,” then-Finance Director Ken
Hydon told analysts in 2005.
Vodafone boosted its tax team in 2007 by hiring the head of
the HMRC unit that dealt with large corporations, John Connors. Connors is now
Vodafone’s head of tax, according to its website.
Connors, Colao and Halford declined requests for interviews.
Around 2008, Vodafone even changed its top management bonus
scheme to ensure that bosses would have a strong incentive for aggressive tax
Payouts under the group’s global long-term incentive plan
(GLTI) are tied to the company’s cash flow. However, large one-off payments to
settle tax disputes are excluded from the cashflow measure used to compute the
This means that if the company doesn’t pay taxes for years,
cash flow is higher than it should be, facilitating a higher payout under the
But if the tax authority comes back and forces the company to pay
back taxes, the payment doesn’t diminish cash flow for bonus purposes.
HMRC has challenged Vodafone’s tax planning in the courts.
In 2010, the company agreed to pay the authority £1.25bn to settle a claim
related to its 2000 takeover of Germany’s Mannesmann, which later became
The taxman viewed Vodafone’s decision to structure the
acquisition via Vodafone Investments Luxembourg S.a.r.l. (VIL) as a tax
avoidance tactic, and sought to tax interest payments to VIL that were payable
out of the profits of the German unit.
The settlement - which was criticised by the Public Accounts
Committee last year for potentially costing the taxpayer millions of pounds -
allowed Vodafone to continue to channel interest payments into Luxembourg.
Though this fact received little press attention at the
time, Vodafone considered it a major coup.
“This agreement preserves the very significant benefits of
our efficient Group tax structure, which we have benefited from for many
years,” CFO Halford said on a conference call to analysts at the time.
UK a soft touch on tax?
Multinational corporations pay most of their taxes in the
individual countries where they have a bricks and mortar presence, tax experts
Hence, Vodafone’s base in Berkshire, to the west of London,
means Britain should enjoy a double dip into the company’s earnings - on income
from its UK phone business and from some overseas income not taxed at the local
But tax lawyers said the UK can suffer financially because
of a willingness to allow structures that might be challenged as tax avoidance
by overseas tax collectors.
“The German system is very rigid and constrained. There
seems less appetite for tax planning and tax-efficient structuring in Germany
than in the UK,” said Ben Jones, tax lawyer at Eversheds.
“In France there is
currently a greater capacity for the authorities to clamp down on structures
they don’t like,” he added.
The system may be about to become even more conducive to tax
Chancellor of the Exchequer George Osborne, who has said
aggressive tax avoidance schemes are “morally repugnant”, has published planned
changes to the tax treatment of overseas subsidiaries that campaigners say will
make it easier for big companies to shield profits from the tax man.
As part of a drive to attract more international businesses
to set up headquarters in the UK, Osborne has broadened the definition of what
could be construed as legitimate use of controlled foreign subsidiaries.
Campaigners including Murphy say this will make it harder
for HMRC to challenge movements of cash to low tax jurisdictions.
The Treasury has estimated the measures could cost the
Exchequer £805m a year by 2016, according to documents on the HMRC website.
Osborne hopes any direct revenue hit will be outweighed by
increased job creation.
But Vodafone’s experience challenges the link between tax
rates and jobs.
Despite the UK’s low headline corporate tax rate and the
absence of actual tax charges on Vodafone’s activities here, the mobile phone
giant has cut jobs here by 23% since 2007, while increasing employment by 21%
in Germany, where corporate taxes are over 30%.
Also Vodafone’s investment in Germany has risen 34% since
2007, against 11% in the UK.
The UK’s relaxing of tax rules is at odds with moves
overseas, and Vodafone is feeling the heat. It faces a major tax challenge from
the Indian government and believes rising fiscal deficits internationally could
“The temptation of taxation that some governments, if not
all governments, are feeling these days - this is really what I would put under
the number one cloud (Vodafone faces),” CEO Colao said last month.