Vodafone/Verizon and the tax which wasn’t!

I watched the BBC news reporting last night of the disposal by Vodafone of the stake in Verizon with despair and dismay. I’ve now read the blogs by Robert Peston on this and I’m even more amazed. I’ll quote Robert:

“Which of course begs the question how much capital gains tax Vodafone will pay to the British taxman, Her Majesty’s Revenue and Customs.

I have learned that the British taxman will not get a penny, which may prove to be controversial.

The reason is that what is being sold by Vodafone is a stake in a US group whose holding company is in the Netherlands. And as a result of that corporate structure, the deal itself will not generate any tax payments either in the Netherlands or US.

That said, for reasons I don’t fully understand, a $5bn tax payment, to the US tax authorities, will be necessary. That $5bn tax bill seems to be a deferred liability from the way Airtouch was reorganised when its US operations were put into Verizon Wireless back in 2000.

Anyway, a $5bn tax bill on sale proceeds of $130bn looks a long way from being prohibitive.”

In a subsequent update Robert goes on:

“Will there be a furore over the absence of any UK tax payments by Vodafone on the £84bn proceeds from the sale of its 45% stake in Verizon Wireless?

Well my understanding is that Vodafone does not believe any tax would have been payable, even if the assets had been held in the UK, and not via a Dutch holding company.

That is because the last Labour government’s 2002 Finance Act introduced an exemption from tax on capital gains from “substantial shareholdings” held by companies.

So, in Vodafone’s view, if MPs on the Public Accounts Committee wants to blame someone for the absence of revenues for the Exchequer from the eye-wateringly huge deal, they should direct their criticism at Gordon Brown, chancellor at the time.”

What shocks me about this is that the correct answer was obvious for anyone who has any knowledge of international tax. The UK (like most other countries in the EU) has a tax system which exempts all (or virtually all) the gains from “substantial shareholdings”. The logic is that tax shouldn’t impose a charge when a business makes a substantial business restructuring – because this might discourage the efficient development of the business. If we want to have a discussion about whether the participation exemption is good policy lets have one, but don’t misrepresent what the letter and the spirit of the current law are.

As Robert says, this change was brought in by Gordon Brown and has been the law for 10 years. So why were senior politicians and the BBC editors ignorant of this – did none of them check? Another interesting question is why do some people appear to “have it in” for Vodafone? If senior politicians thought this was such a bad idea in 2002, why did they vote for the legilation?

But enough of that, what should be done? Well this is a further illustration of the need for proactive explanation of tax by business and I think also of the need to educate the fourth estate before they report tax as inaccurately as has been the case here. Business needs to step up to the plate.

Finally, its nice to be back although episodes like this make me feel I’m in tax groundhog day in terms of the reporting of tax.

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