Did it use aggressive tax shelters to avoid UK tax?
The Reuters examination of Vodafone’s statutory filings across Europe over the past 16 years couldn’t have come at a worse time. While there is a possibility, with a change in guard in the finance ministry, that the Indian government may be doing a rethink on its tax liability on the purchase of Hutch’s India operations, the Reuters investigation alleges that, by using available tax shields, Vodafone may have saved on around £1 billion in taxes in the UK over the past decade. While Vodafone made profits of £530 million between 1998 and 2003, Reuters says its profits plummeted after that while revenues soared—in the last three years, it has racked up losses of over £100 million each year. The way this was done, according to the Reuters investigation, was ingenious: Vodafone began making large interest payments on amounts borrowed from group companies in low-tax regimes like Luxembourg (where financial profits are taxed at under 1% as compared to the UK’s 24% rate for corporate profits). For the record, Vodafone denies it did inappropriate transfer pricing and says Reuters has got it wrong.
While the findings of the investigation will be highlighted by those in favour of Pranab Mukherjee’s retrospective tax amendment—the argument goes that Vodafone was morally obliged to pay taxes in India on its purchase—it’s important to keep tabs on how the UK responds to the case. While UK authorities say aggressive tax avoidance schemes are morally repugnant, they are planning their moves carefully as a tighter tax regime may backfire if firms simply stop investing in the UK. And once that hurdle is got over and a final tax regime is chosen, there is no indication as of now that this will be retrospective in nature. Whichever way the Vodafone case goes, it will be watched keenly in India.