UK and International Tax news

Vodafone Settles CFC Tax

Saturday 31st July 2010

It is understood that Vodafone has recently settled its long-running dispute with HMRC over the taxation of its foreign earnings. The company will pay £1.25 billion to settle all outstanding controlled foreign company (CFC) issues from 2001.

In March 2000, Vodafone, which is UK resident, established a wholly owned Luxemburg subsidiary, Vodafone Investments Sarl (VIL), as a holding company for some of its European investments, including newly acquired Mannesmann. Luxembourg has long been considered a tax haven by non-governmental organisations and until last year was on the list of countries that have not implemented the OECD standard on the exchange of tax information.

HMRC claimed that the CFC rules applied to the Luxembourg subsidiary because the company was making profits in a low tax jurisdiction. Vodafone contested HMRCs claim on the grounds that paying tax in the UK on its Luxembourg earnings would be an illegal restriction on its freedom of establishment in the EU. In July 2008, the High Court supported Vodafones argument, but its ruling was overturned by the Court of Appeal last year, which decided that CFC rules should apply to companies operating outside the European Economic Area (EEA) and to EEA companies without genuine economic activities.

Vodafone has confirmed that it had originally provided £3.1bn against tax (£2.2bn) and interest (£0.9bn) and therefore has settled for less than half of the total provision.

Under the settlement, Vodafone will not be liable for any UK CFC tax liabilities in the near future under existing legislation. In the longer term, the company also does not expect further liabilities to arise because of reforms to CFC legislation.

If you would like discuss the proposed reforms to the existing CFC rules in more detail, please contact Keith Rushen on +44 (0)20 7486 2378

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