British government ministers and officials have been lecturing India about its move to force telecoms giant Vodafone to pay back-dated tax on its 2007 acquisition of Hutchinson’s Indian mobile phone assets. Now it turns out Vodafone avoided paying a single penny in taxes in the UK last year in an alleged deal with the UK tax department.
Vodafone saw its global corporation tax bill go up by £300 million to £2.3 billion last year, but none of it was paid in the UK, where Vodafone has more than 19 million customers. According to The Sunday Times, the company’s British corporation tax bill fell to zero from £140 million in 2010-2011, despite an increase in underlying earnings from £1.2 billion to £1.3 billion.
Britain is Vodafone’s home country — the reason Osborne met Pranab Mukherjee earlier this year to press his case about India’s retrospective measure. Yet the company avoided paying a single penny in taxes — a case of ‘aggressive avoidance’ if ever there was one — through what the paper described as a “series of accounting manoeuvres.”
“Vodafone reduces its taxable income in Britain by funnelling loans through a subsidiary in Luxembourg. Interest payments on the loans cut its taxable profits in Britain, and allow it to benefit from lower rates in Luxembourg,” the paper reported. Indeed, it was able to reclaim £4 million from the UK tax department. Servicing debt reduces the amount of profit on which a company is taxed. In the case of Vodafone’s main British entity, it appears that the majority of debt is to other companies owned by Vodafone, creating a web of intra-company loans, the Times reported on Monday.
Vodafone is no stranger to tax controversies in the UK. It became the target of a campaign by anti-austerity campaigners UK Uncut after avoiding paying billions of pounds in taxes owed from its 2000 takeover of the German telecoms firm Mannesmann. Instead of the £2.2 billion originally earmarked, in July 2010 the company hammered out a deal with the tax department that allowed it to pay £1.25 billion.
According to The Sunday Times, the 2010 deal has generated a £791 million “deferred tax asset” at an offshoot in Luxembourg which the company can use to cut its liabilities in the UK over the coming years. A note in Vodafone’s annual report says that £791 million of a “deferred tax asset has been recognised as a result of the agreement being reached with the UK tax authorities.”