Friday, September 10, 2010

Vodafone: Indian taxpayers 1, Britain's taxpayers 0

Vodafone has been in the news of late in a heartening story about a developing country which has seen through an offshore sham and claim a large tax bill. Another story shows a very different approach to Vodafone, in what the superb investigative magazine Private Eye describes as "an unbelievable cave in" by Britain's top tax inspectors. (As we just blogged, these people are now "at melting point.")

First, India. The New York Times has laid out the issue.

"Indian tax authorities argued that Vodafone should have withheld capital gains taxes from the $11 billion it paid to Hutchison Whampoa for its 67 percent stake in Hutchison Essar, which is now known as Vodafone Essar, India’s third-biggest cellphone company by subscribers. Indian officials contend tax is owed on the deal because the assets sold are based in India — a position that the court affirmed on Wednesday — and that Vodafone, as the buyer, was responsible for remitting the money to the government. But Vodafone has maintained that no tax was owed on the transaction because it took place between offshore corporations — Vodafone and Hutchison — and the entity that was acquired was legally registered in the Cayman Islands."

So: the transaction was an offshore sham, designed to avoid tax on the sale of real assets in India. The Indian authorities saw through the sham, and decided to act on what was happening in the real world. This kind of approach -- and it is widely seen as a precedent-setting one -- is to be greatly welcomed, although India isn't out of the woods yet, as Vodafone is expected to appeal.

Joe Leahy at the Financial Times takes up the special pleading on Vodafone's behalf:

"Some might praise the Indian tax authorities pursuing the case against Vodafone for raising funds for the exchequer and for penetrating the legal fiction that allows powerful corporations to hide behind tax havens. But for India, there is a greater issue at stake here. A couple of billion in tax dollars seems small compensation in exchange for damaging the country’s reputation as an investment destination."

Leahy has misunderstood the "greater issue." Which is that companies ought to be taxed according to the substance of the economic transaction that has taken place, not whatever bizarre offshore manipulation the lawyers and accountants have hatched up. Now that is the greater issue.

Now to the latest story in Private Eye. This concerns its $180bn purcase of Manesmann a decade ago, routed through a Luxembourg subsidiary called VIL. In what is surely the result of transfer pricing strategies, Vodafone has earned $15.5bn in that Luxembourg subsidiary up to March 2009, taxed at less than 1%. That, plus the income since them, has cost the British taxpayer some $5 billion. Her Majesty's Revenue & Customs (HMRC) was confident, it seems, that it could get that cash back, as Private Eye explains in detail.

Enter Dave Hartnett, HMRC's top official. (As an aside, we have had our own ears bent by anonymous senior HMRC officials who have described with horror the kowtowing to big business that has marked his tenure, and an appalling culture of subservience towards what are now officially known as HMRC's "customers", which started on the watch of former Prime Minister Tony Blair.) The FT noted an even worse deterioration of standards on August 19th in an article entitled Tax officials to soften stance on avoidance, in which it was argued that HMRC will "adopt a less combative approach to resolving tax disputes with businesses."

So back to Vodafone's case. Private Eye calculates that the "unbelievable cave-in" that resulted from the new negotiations is likely to cost Britain at least six billion pounds. Which is, as The Eye notes,

"coincidentally the level of public spending cuts for this year that dominated much of the general election campaign."

Britain brought us light-touch financial regulation. Now we have light-touch tax.


Anonymous Fred Z said...

Worstall must be too tired to comment, so I'll steal his words:

"So, taxes should be paid where the economic substance of the transaction takes place.

So, capital gains tax on assets in India should be paid in India.

And further, profits tax on profits made in Germany should be paid in Britain."

I look forward to my comment being deleted.

8:01 am  
Anonymous TJN said...

Well, cutting and pasting from a comment under his blog (comment slightly edited, for politeness' sake):

"The question of residence-based taxation and source-based taxation is a highly complex one, as I am sure you know. Nobody advocates a one-or-other approach – and the tax justice network blog is an example of taking that reasonable position of supporting both types. This is a question about whether giant multinational corporations pay tax or not, according to the substance of what they do and what they earn. Or whether they twist themselves into artificial, gymnastically challenged legal freaks in order to escape tax and free ride on the public goods that they benefit from. There is no contradiction."

For more on this, see here
in which it says "source-based taxation but keeps the option of residence-based taxation, still seems the best option to preserve the revenue base of both developed and developing countries."

1:23 am  
Anonymous TJN said...

and actually TJN supports a system of formualry apportionment with unitary taxation, which is the neatest and best way of dealing with these complexities. Read more here.

1:28 am  
Blogger Physiocrat said...

Doesn't Vodafone pays to keep TJN going?

7:27 pm  

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