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Vodafone’s $130 Billion Deal Gets Tax-Avoidance Outrage

Vodafone just sold their holding in Verizon Wireless, back to Verizon, for a mighty $130 billion. And the deal has a very interesting structure.

Vodafone’s stake is held in a US subsidiary, which is owned by a Dutch company, which is owned by Vodafone. If the US subsidiary had sold the stake, the subsidiary would pay US Capital Gains of $38 billion. This is quite a huge amount.

The way they chose to avoid this tax was to have Verizon buy Vodafone’s US subsidiary itself. Effectively, Verizon would Then, gains are in the books of the Dutch company, which is not taxed in the US.

Vodafone’s US subsidiary owns other stakes, and those will be sold back to Vodafone separately, with some tax planning thrown in. In order to avoid the US tax authorities probing an offshore storage of money, Vodafone will return the money to its UK shareholders as a dividend.

It looks like a lot of influential people in the UK think this is deeply disturbing. With Vodafone earning a windfall and paying no UK or US taxes, authorities are being pressured to find a way to tax it.

Vodafone has been blamed of using a similar tax structure to help Hutchison promoters avoid Indian capital gains taxes. The ownership of the Indian telecom company was in a foreign entity owned by Hutch, and Vodafone just bought that entity. A lengthy court battle ensued, where the government claimed tax because it was obvious the deal was structured only to avoid tax, which Vodafone should have deducted. (Hutch is no longer in India) The courts decided in favour of Vodafone.

Since then the Indian Government has changed the law to ensure that any such transaction, which results in a change of control of an Indian entity, will be taxed under Indian capital gains laws.

However, the government made the change “retrospective”, which meant it didn’t just apply from then onward, it applied to past transactions also. This didn’t go well with the investor community – obviously, since there is no clarity of anything if you can change laws retrospectively.

It’ll be interesting to see how the western economies react. Will the US decide that the ownership being transferred is held in a US entity and therefore Vodafone must be taxed? Will the UK attempt to charge tax anyhow, even though they will get some taxes through the dividends paid out by Vodafone?

India’s stand might be vindicated if they manage to tax vodafone, or, if they let it be, it’ll be a lesson in how to handle such a situation.

  • Alok says:

    Just a minor quibble re Vodafone litigation.
    There were two rounds of litigation – first round was where the show cause notice from the Department for payment of TDS was challenged in the Bombay High Court by Vodafone. Here the Bombay High Court upheld the notice and in appeal, the Supreme Court directed government to decide on whether the jurisdiction lay with Indian authorities but upheld the show cause notice.
    The Second round was the challenge to the order finding that jurisdiction rests with Indian authorities to demand tax from Vodafone on the transaction. The Bombay High Court upheld the order of the Department, but in appeal, the Supreme Court reversed Bombay High Court judgment.
    From a first reading of your piece, one gets the impression that Vodafone won throughout in Indian courts, but in fact they lost the first round, lost in the Bombay High Court in the second round, but finally won in the Supreme Court (of course, the one which matters).
    Given divergence of views among the courts, one would think that a clarificatory amendment (even with retrospective effect) would not be bad policy per se. Unfortunately, the govt seems to have gone a bit berserk with the amendments and caused more confusion and panic among foreign investors.

  • Sanjeev B says:

    If the Supreme Court has ruled, it is as good as law. The government has to abide by that.
    And retrospective laws are just bad. They go against the basic principle of natural justice.
    Governments around the world need to keep the laws simple, and tax less, then there will be no incentive nor any ethical reason to avoid this.