British telecoms company Vodafone will not have to pay any tax in the UK on the $130 billion (£84 billion) sale of its stake in a Verizon Wireless unit because the sale was made by an overseas subsidiary.
Under the deal, UK-headquartered Vodafone sold its 45 percent stake in Verizon Wireless, which will result in Verizon Communications taking 100 percent ownership of the wireless unit, the largest mobile operator in the US.
However, while it looks like Vodafone will earn profit in the tens of billions of dollars, the sale is exempt from UK corporation tax - a rate of between 23 percent and 24 percent - because the shareholding was sold by a Netherlands-based subsidiary of Vodafone, and the tax does not apply to overseas companies.
Furthermore, the sale is not liable for tax in the Netherlands, despite the seller’s location, because under Dutch law, shareholders benefit from a participation exemption on dividends received and capital gains arising from the sale of shares.
A spokesperson for Her Majestery’s Revenue & Customs (HMRC), said: “We do not comment on tax arrangements for individual companies. HMRC ensures that all businesses pay the tax due in accordance with UK tax law.”
But, US tax is payable
Due to a complicated business structure, Vodafone will nevertheless be required to pay an estimated $5 billion (£3.2 billion) to the US tax authorities.
This is because when Vodafone merged with AirTouch in 1999, it acquired the US mobile assets of the company (which later became Vodafone’s stake in Verizon Wireless) but also minority stakes that AirTouch had in mobile businesses outside the US.
Before it can complete the Verizon Wireless sale, Vodafone needs to separate the US parts of the wireless unit from its rest of the world interests, so that it retains the stake in those businesses. This reorganisation will make the company liable to tax under standard Internal Revenue Service (IRS) rules.
This is not the first time that Vodafone has faced controversy over tax. There was uproar last year when it emerged that despite the company’s global corporation tax bill going up by £300 million to £2.3 billion, none of the money was paid to the UK because Vodafone was able to offset the bill against its capital expenditure.