The dodgy house of Vodafone

In this guest blog Richard Brooks, author of The Great Tax Robbery, explains why Vodafone’s tax dodge is still so scandalous.

Vodafone epitomises 21st century international corporate tax avoidance.

When the company took over German engineering company Mannesmann in 2000, it structured the deal using a Luxembourg holding company and twice as much internal debt than the whole group had really borrowed. This financial alchemy enabled it to funnel billions of pounds of otherwise taxable profit as interest payments from Mannesmann and other European operations into a Luxembourg company taxed at less than 1%. With tax dodging shaping the business, Luxembourg became (on paper) Vodafone’s most profitable territory without selling a single phone contract.

Under British tax law at the time, the profits of a UK multinational diverted into a tax haven would have been taxed in the UK. Indeed, the Labour government had not long before enacted specific legislation to ensure that the arrangement Vodafone proposed was caught. But after unsuccessfully lobbying for a concession, the company went ahead anyway and argued that European law (never intended to facilitate tax avoidance) overrode UK law.

A decade long legal battle ensued, during which time Vodafone repeated the trick with its investment in US firm Verizon, through another Luxembourg company. Despite holding the upper hand after a 2009 Court of Appeal ruling that Britain’s tax law could be compatible with European law, HM Revenue and Customs boss Dave Hartnett struck a deal with Vodafone and its adviser David Cruickshank (the chairman of Deloitte with whom Hartnett personally negotiated many big cases and who would soon become his employer!) The company would pay just £800m tax and a further £450m over five years (a time-to-pay arrangement that ordinary taxpayers would never be allowed) and have a free pass for the future. At the time I estimated the deal was worth around £6bn to Vodafone, but since this excluded the US transaction that was diverting around $2.5bn a year profits into Luxembourg yearly from 2006, it looks like an under-estimate.

 Multinationals don’t like working this hard for their tax breaks and, while the Vodafone legal wrangle went on, they had set about persuading the government to change the law so that schemes like Vodafone’s automatically work. In 2010 George Osborne’s Treasury created a series of working groups to propose new rules, including one to address offshore financial schemes like those used by Vodafone to shift profits into tax havens. On it sat… Vodafone’s tax director (and former senior HMRC official) John Connors. The group duly produced just what Vodafone wanted and George Osborne obligingly enacted the changes in his 2012 finance bill.

 In an unguarded conversation with City analysts in 2010 Vodafone’s finance director confided that “a reasonable proportion of the group’s free cash flow [around £6bn a year] obviously does come from the tax efficient structuring”. The phenomenal size of the advantage became clear recently when the company brought onto its balance sheet a “tax asset” of £17.4bn. This represents the reduction in future tax bills (over twice the UK’s annual aid budget) that Vodafone will enjoy by diverting profits from around the world into Luxembourg thanks to Britain’s emasculated corporate tax law.

So Vodafone first defied British tax law, then negotiated an escape from its full effect, then helped change the law so its schemes would never be caught again. The result is tens of billions of pounds kept from government budgets. Or, in language the tax accountants wouldn’t understand, millions of people deprived of the education, healthcare and benefits they deserve.

 That’s something worth protesting about.

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