Vodafone agrees to pay CFC tax bill of £1.25bn
Vodafone, the mobile phone operator, announced that it had reached agreement, on 22 July 2010, with the UK tax authorities in respect of its long-running controlled foreign company (CFC) tax case.
Vodafone is to pay £1.25 billion to settle all outstanding CFC issues from 2001 to date and has also reached agreement that no further UK CFC tax liabilities will arise in the near future under current legislation.
This was much less than the provision of £2.2 billion carried in Vodafone’s accounts. The settlement comprises £800 million in the current financial year with the balance to be paid in instalments over the next five years.
UK CFC tax legislation is designed to stop UK companies avoiding tax by diverting income to subsidiaries in low-tax countries. Last December, Vodafone lost its battle to appeal against a court ruling that it was liable to pay the tax.
The UK Supreme Court said Vodafone's application to appeal "did not raise an arguable point of law of general public importance". It followed a Court of Appeal ruling that had overturned an initial ruling that the firm would not have to pay corporation tax on a holding company owned in Luxembourg.
Vodafone had argued that its subsidiary, set up following the acquisition of Mannesman in 2000, should not have to pay UK corporation tax because UK rules on taxation of profits on CFCs were incompatible with EU law.
The Court of Appeal found that CFC rules applied to companies operating outside the European Economic Area and also to EEA companies without genuine economic activities. But the question of whether the rules should apply to Vodafone's Luxembourg subsidiary was not decided.
The settlement coincides with new UK Chancellor George Osborne's pledge to make Britain "open for business" by reforming "the complex CFC rules that have driven business overseas". The government's planned reforms are aimed at stemming an exodus of more than 20 UK multinationals that have left for smaller countries, such as Ireland, which had no CFC rules.
The Vodafone deal has implications for some 150 other companies that are locked in similar disputes concerning an estimated £2.5 billion of tax. Signs of greater flexibility by the Revenue are expected to encourage many of these companies to settle.
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