Vodafone in ‘climb down’ over disputed India tax bill

Volte-face could cost it more than £1 billion

Britain’s Vodafone could be bracing itself to pay more than £1 billion to the Indian government despite resisting legal action so far. The world’s second-largest mobile-phone operator after China Mobile has been locked in a tax feud with India over its 2007 acquisition of Hutchison Whampoa’s operations there. The row relates to how Vodafone avoided a huge tax bill by concluding its $10.7 billion transaction offshore, using the company’s Dutch subsidiary Vodafone International Holdings to buy a Cayman Islands firm controlled by Hong Kong-based Hutchison.
The Indian government accused Vodafone of dodging corporate tax and, despite being defeated in the nation’s top court in January this year[2012], has since amended its laws retrospectively to embrace such cross-border transactions – dating them back to April 1962.

Until now Vodafone has continued to challenge liability for tax on the deal, claiming it will go to international arbitration if need be.

But in a new interview with Bloomberg, its chief financial officer Andy Halford has admitted Vodafone may now need to make a provision to cover the risk.

Though he did not put a figure on it, one analyst – Andrew Hogley of Espirito Santo in London – values the liability at £1.3 billion.

Vodafone’s apparent change of heart comes as the company faces as much as $4 billion in spectrum costs in an upcoming Indian auction, the success of which hinges on Vodafone and the Indian government working together.

The British operator is relying on fast-emerging mobile markets such as India to compensate for falling sales in Europe where until now it has derived more than two thirds of its revenue.

Equally India, with its own faltering economy, needs inward investment by foreign firms with Vodafone alone investing more than 500 billion rupees ($9.3 billion) in the country since 2007.

According to Bloomberg, Halford says India is now making “more conciliatory noises” about the size of Vodafone’s tax liability – perhaps explaining why the company is ostensibly willing to make a reciprocal gesture by setting aside new funds to cover the debt.

But India also has a new finance minister, Palaniappan Chidambaram, who has ordered a review of the retrospective tax laws that landed Vodafone with a $2.2bn bill.

Vodafone and other operators such as Norway’s Telenor and Sunil Mittal’s Bharti have helped India to build the world’s second-biggest mobile-phone market since the government opened up the industry in the 1990s.
Subscribers now total more than 900 million and enjoy some of the world’s cheapest calls.

Closer to home, however, Halford is reported by Bloomberg as saying the company may have a “zero tax” bill in the UK once the cost of its international operations are offset, despite analysts predictions that the company will report a net income of £7.9 billion for the year to March 2013.

Currently, Vodafone pays only 4 per cent of group profits in UK corporation tax, but Halford is quoted by Bloomberg as hinting it may pay even less.

“A business that has made disproportionate contributions to the UK and is allowed to offset a large part of its overall group debt against earnings is not going to be a high taxpayer. It may be a zero taxpayer,” he is reported saying.

Vodafone is scheduled to report first-half earnings in November.
In early London trading today [17th September 2012] the company’s shares had slid to around 174 pence, compared to Friday’s week high of 178 pence.