Vodafone loses UK tax appeal

Four days after Vodafone announced its annual profits had halved and it expected income to remain flat for the rest of the year, Vodafone Group plc has lost a UK court case that could cost it £2.2. billion.
Last Friday, HM Revenue & Customs (HMRC) successfully appealed a High Court decision from last July, which relates to taxes on a Luxembourg subsidiary set up by Vodafone after its controversial acquisition of German operator Mannesman in 2000.
The company still has the possibility of taking its case to the UK’s top court, the House of Lords, to appeal Friday’s decision.
Vodafone stated it had set aside £2.2 billion for tax liabilities and interest in its last annual report.
HMRC is pursuing Vodafone Group plc on the grounds that it contravened Controlled Foreign Companies legislation, which prohibits British companies transferring revenue to lower taxation countries to avoid paying tax in the UK.
Last summer the High Court agreed with Vodafone’s submission that this particular area of British law is contrary to European Union Directives. On Friday the Court of Appeal disagreed, clearing the way for HMRC to proceed with its investigation.
In the meantime, Vodafone is still waiting to hear from India’s tax authorities concerning a $2 billion capital gains tax case. In January India’s Supreme Court asked the country’s tax authorities to determine whether they had the jurisdiction to proceed against Vodafone.
The dispute dates back to 2007 when Vodafone bought a controlling stake in an Indian mobile operator, Hutchison Essar, owned by a subsidiary of Hong Kong’s Hutchison Whampoa, for US$11.1 billion.
Vodafone has argued that Indian law did not require it to deduct tax from the price paid and insisted capital gains tax should be paid by the seller, not the buyer.
Vodafone appealed to the Supreme Court after the Bombay High Court dismissed its petition against the tax bill in December last year.
The tax department said the deal is liable for capital gains tax because most of the assets are based in India and because under Indian tax law, buyers have to withhold capital gains tax liabilities and pay them to the government.
The Supreme Court gave Vodafone special leave to take the case directly to the high court if the tax authority decided against it.