On October 27, 2010, a group of 30 protestors marched along London's Oxford Street up to the flagship store of telecom giant Vodafone, chanting “Pay your taxes!” During the next few weeks, Vodafone stores across Britain became targets of protest, as a group calling itself “UK Uncut” took shape. The trigger had been an investigative piece in the satirical magazine Private Eye , alleging that Vodafone had ducked some £ 6 billion in taxes when it acquired Germany's Mannesmann in a €175 billion deal in 2000.
The allegations of avoidance — vigorously denied by Vodafone and British authorities as an “urban myth” — came at a time when billions of pounds worth of welfare reductions were being made in Britain. That disconnect really struck a chord with the public, helping shape a protest movement that continues to date, says Ms Molly Solomons, a UK Uncut activist.
The company's controversial reputation when it comes to tax helps explain why few people in Britain would be surprised to hear that the company at the heart of a major tax dispute with India is none other than Vodafone. In 2010,
At first, Britain's Her Majesty's Revenue and Customs didn't take kindly to the deal, and a legal battle ensued to claim taxes. Ultimately, however, the matter was settled, with Vodafone agreeing to pay £1.25 billion, considerably below the £2.2 billion it had originally set aside for the dispute.
(Vodafone says it never believed taxes were due, that the £2.2 billion set aside just reflected the “complexity” of the matter, and that it struck the deal simply to settle “10 years of litigation and consequent uncertainty.”) However, based on accounts of the Luxembourg subsidiary it had access to, Private Eye estimated the tax bill would actually have amounted to € 6 billion.
CONCILIATORY APPROACH
At the time, Mr David Harnett, the permanent secretary for tax at HMRC, signalled that henceforth there would be a more conciliatory approach to such disputes. He told the Financial Times that while the department was “full of very intelligent people”, they were sometimes “too black-and-white regarding the law.”
The change in approach was ostensibly done in the name of efficiency and reducing backlog, but critics saw it differently. Mr Richard Murphy, who runs Tax Research UK, questions the timing of the deal. Soon afterwards, in August 2010, British Chancellor of the Exchequer, Mr George Osborne, raised the matter of Vodafone's dispute with Indian tax authorities during a visit to India.
While it may have been a coincidence, the timing was “unusual”, says Mr Murphy. “It gave the impression that a deal had been settled in the UK to let Mr Osborne go to India to negotiate on their behalf for the biggest tax liability”. (Vodafone denies any such link.)
Still, many saw the resolution of the HMRC case — at a time when a Court of Appeal ruling seemed to give British tax authorities the upper hand — as yet another sweetheart deal, symptomatic of Britain's well-trodden approach of lightly-does-it-or-else-they-will-flee attitude towards taxation.
Last December, the House of Commons' powerful Public Accounts Committee expressed “serious concerns” that HMRC had left itself open to suspicion that its relationships with large companies are too convenient. While the report didn't mention Vodafone, both that controversy and one involving a settlement reached with Goldman Sachs were repeatedly brought up in the MPs' discussions.
THE INDIA VISIT
“The British government has for some time taken the view that it is a good idea for them to be a tax haven, providing loopholes and tricks of financial engineering to attract large amounts of business to the city,” says Mr Nicholas Shaxson, author of the influential book Treasure Islands , a meticulous study of secrecy jurisdictions across the globe, including Britain's own complicity in that network. “That whole way of thinking has permeated the British establishment.”
The past few years have seen the British government repeatedly intervene in the matter of the Rs 11,000-crore tax that Indian authorities say they are owed as a result of the Vodafone-Hutchison deal in 2007.
The most recent example came during Mr Osborne's visit to New Delhi earlier this month, not long after the Indian government announced its plan to amend the Income Tax Act 1961 so as to make mergers and acquisitions involving domestic assets subject to capital gains tax retrospectively. This included that between Netherlands-based Vodafone International Holdings and Caymans-based CGP, the latter holding 67 per cent of Hutchinson Essar Limited.
The message to India from Mr Osborne, Vodafone, and a chorus of industry bodies was in essence: reverse the decision or investors will be put off. This argument has been used repeatedly when countries or firms disfavour a particular piece of legislation or regulation that shows no sign of disappearing.
However, the prospect of a big multinational pulling out is unreal, according to Mr John Christensen, director of the Tax Justice Network. He believes that India's current efforts to bring past deals into the fold sets an important international precedent. “People have a huge problem with MNCs and what is happening in India sends a strong signal to the rest of the globe,” he says.
FACE-SAVING MOVES
Mr Shaxson cites the many oil-producing states where, despite effective tax rates on MNCs running as high as 90 per cent, companies aren't deterred from investing. “This is just rhetoric… bluff and bluster,” he says.
Ms Taina Erajuuri, portfolio manager at Finland-based investment fund FIM India, is also sceptical that the tax will deter investors.
“India has a very long-term growth story and I don't think it will force people not to invest… investment companies don't have many growth opportunities elsewhere,” she says. “Everyone complains and no one wants to pay tax, but at the end of the day, every country needs its tax revenues.”
The to-ing and fro-ing on the Vodafone matter may be messy, but then tax battles globally are never straightforward, and often involve less-than-ideal tactics. One need only consider the recent stand-off between Switzerland and Germany regarding the former's decision to issue arrest warrants against three tax inspectors who had acquired a CD containing stolen data on alleged tax evaders.
However, the factor that may most weaken Britain's case against the retrospective tax lies much closer to home. Facing a fair amount of public anger on past sweetheart deals and a perceived softly-softly policy towards tax avoidance, the government recently decided to close two tax avoidance schemes retrospectively. As a consequence, Barclays will be liable for £500 million.
The irony isn't lost on Mr Murphy, who says that at a recent meeting, an HMRC director defended the use of such legislation when it came to Barclays, in view of the seriousness of the matter, the sum involved, and the fact that the bank should have known its tax avoidance stratagem would be unacceptable.
Circumstances that sound familiar, anyone?