Vodafone - Background info

As angry protestors tussled with police in front of Vodafone’s flagship store in London yesterday, friends and passersby held out their mobile phones to take pictures of the spectacle. Some will have sent their photos over Vodafone’s own network to spread the word about the protest – which was against Vodafone.

Irony aside, Vodafone is nursing the mother of all tax headaches both on its home turf (the U.K.) and one of its most promising markets, India. Yesterday’s protestors shut down its store on London’s Oxford Street, after accusing the British mobile network giant of dodging a £6 billion ($9.5 billion) tax bill here in the U.K. at a time when the government is slashing its deficit by roughly $180 billion and trimming its previously-sacred welfare budget.

Both Vodafone and Britain’s Inland Revenue Service (known formally as HM Revenue & Customs or HMRC) deny that the company owes that much. But the campaigners are adamant. Their accusation stems from an article in the British news magazine Private Eye, reporting the figure in September in relation to Vodafone’s 180 billion-euro purchase of German engineering company, Mannesmann in 2000.

You can read Private Eye’s article here, but it essentially says that Vodafone bought Mannesmann via a Luxembourg holding company to avoid tax charges (an arrangement that HMRC at the time did not condone) into which it deposited profits at very low tax rates. Accounts for the holding company show that Vodafone deposited 15.5 billion euros in profit into the Luxembourg company up until March 2009, which, Private Eye says, suggests there must be around 18 billion euros in there today resulting in £5 billion ($7.9 billion) in lost tax revenue and interest for the U.K. The article, written by Richard Brooks, says the bill for lost tax is “likely to be at least £6 billion” and quotes a former official at HMRC as calling it an “unbelievable cave-in” by the tax authority to Vodafone.

Following negotiations with HMRC, Vodafone had agreed in July to pay £1.2 billion ($1.9 billion) to settle the long-running dispute, even though the company had previously said it was putting aside £2.2 billion ($3.5 billion) to cover what it owed the taxman.

Putting aside the £6 billion-figure, why did it end up paying so much less than its provision? Vodafone spokesman Bobby Leach tells me it had put aside £2.2 billion based on audited accounts and this was not a reflection of the maximum risk that Vodafone saw itself as paying out in the settlement.

HMRC has officially said that it rigorously examined the facts and there had been an “intensive process of negotiation” with Vodafone, and adds, “that number [6 billion] is an urban myth.”

But tax specialist and blogger Richard Murphy thinks the tax man should have done a little more digging, and he points to some oddities in the negotiations and timing of events. Firstly, the man who negotiated on behalf of Vodafone for its tax settlement, John Connors, had previously worked at HMRC as the head of its large business services division, and negotiated on behalf of the tax authority. That is until April 2007, when Vodafone hired him and he moved to the other side of the negotiating table.

“Vodafone managed to poach the guy they were negotiating with, and then they got this [settlement for] less,” says Murphy, adding that when he later met Connors at tax conferences, the former taxman said that former colleagues in the industry weren’t talking to him anymore. “He was clearly seen as having betrayed the Revenue. He was one of their most notable departures.”

Then, he says, there’s the settlement’s timing. Vodafone had reached its agreement with HMRC to pay £1.25 billion on July 22 and announced it in its interim management statement (on page 7) for the quarter the following day. Several days after that, Chancellor of the Exchequer George Osbourne travelled to India to promote Vodafone’s business and discuss the company’s other huge tax problem there, related to back-taxes it owes from its acquisition of Indian assets of telecom giant Hutchison Whampoa in 2007.

Osbourne visited the country India again last month to lobby against Vodafone’s multibillion dollar tax bill. “It just looks odd,” says Murphy. “There was a question about whether the [U.K.] tax settlement was politically motivated… George Osbourne’s visit to India could not have been arranged in a few days notice.” Vodafone’s Leach did not wish to comment on the government minister’s trip to India.

Osbourne’s lobbying efforts in any case, haven’t entirely helped. Last Friday Indian tax authorities told Vodafone in their first formal notice that it owed $2.5 billion in capital gains taxes for the Hutchison takeover. On the back of it being unusual to charge the purchaser of a company with capital gains tax (when it’s the seller gaining capital) this also represents a 50 year-precedent for the taxation of a transaction between two overseas companies in India, according to Leach. (And a worrying precedent at that for companies wishing to make acquisitions in India.)

Yesterday the Bombay High Court deferred hearing Vodafone’s appeal after the company said it needed more time to work out the details of its liability, according to The Hindu. Its tax flaps in India and the U.K., it should be noted, are not connected. But if Vodafone was indeed fortunate to reach the settlement it did with the U.K.—fortunate in that the total sum was less than HMRC had deemed appropriate–its investors and management will be hoping something equally fortuitous will happen in India.