Vodafone: Tax Dodger or Brilliant Financial Mind?

“Vodafone faces a fresh attack over its affairs after an investigation by the Sunday Times revealed that the mobile phone giant paid no corporation tax in Britain last year. Despite earning several hundred million pounds from its 19 million customer, Vodafone shared none of these profits with HM Revenue and Custom in the UK in the 12 months to the end of March, 2012”, (The Sunday Times, 10^th June 2012, Business, p.1). The revelation comes amid heightened scrutiny of the tax bills of multinational companies as governments scramble to patch up their public finances.

The Sunday Times tell us that the underlying earnings before interest and tax at Vodafone’s British operation rose from £1.2 billion to £1.3 billion in the year end of March. Adjusted pre-tax profits rose from £348 million to £402 million over the period. However, its British corporation tax bill fell from £140 million in the 12 months to 31^st March, 2011, to zero in the year just ended.

Vodafone, Apple and scores of other multinationals have created subsidiaries in Luxemburg in an attempt to minimise their tax bills in big markets such as Britain. Luxemburg is an aggressive adversary when it comes to tax. On the surface, it is a model international citizen, playing host to the European Court of Justice and the secretariat of the European Parliament.

The country is, nevertheless, exacerbating the crisis that threatens to smash apart the single currency in Europe by denying governments billions in taxes. 

Vodafone and others aren’t breaking the law by doing this and are upholding their responsibilities to their stakeholders through profit optimisation. Most people aren’t that sympathetic towards the taxman at the best of times, so there will be those that are saying ‘good for them’, just before instructing their broker to buy shares in Vodafone.

But this ‘clever manipulation’ raises a number of questions, like whether business is operating on a fair and equitable playing field, where these benefits are open to all that want them? But hold on – if they were, where would HMRC get its tax income from? So, in what seems to be a common theme these days, there appears to be two distinct sets of rules – one for the large and powerful organisations and then for the rest.

As much as I’d like to be critical towards Vodafone, I can’t actually fault what their financial team are doing – in fact, as much as it pains me to say, one has to applaud them for finding a way to optimise their financial returns to their stakeholders – it’s what they’re paid to do.

So the fault must sit with governments for not finding and closing these loop-holes that allow the richest organisations to get away with not paying tax in the country where they are generating vast profits. The same governments that complain about the lack of money they have available to spend on education, health and security, which leads them into borrowing a debt – leading to recessions like we’re currently experiencing – it’s absolutely crazy. While the big boys are sipping their champagne to a job well done - thee SME sector is targeted, harassed and chased for even the slightest deviation from their tax obligations – so how must they feel when they read stories like this?

It’s worth noting that Amazon avoids even more tax by using a similar method. By shuttling money through Luxemburg, it managed to pay no corporation tax in Britain last year despite generating sales of more than £3 billion in the UK.

Call me naïve, but one has to wonder just how much of an impact these practices have had on the current austerity measures being employed by governments throughout Europe.

It would appear that big business is being allowed to blackmail and manipulate governments by threatening to move their organisations offshore and lay people off, if governments try to close these tax loopholes. But hello – these governments aren’t getting any income from these organisations anyway – but more importantly these governments are elected to ‘protect’ their citizens, so where is the leadership that’s required to enforce the fair and equitable gathering of taxes for the good of the nation.

When you think about it, this practice seems to have been going on through the centuries, where the hard working owners of small businesses were chased by the taxman and severely punished for the slightest irregularity – to the extent that organisations were closed and proud men lost everything. While at the other end of the scale the wealthy land owners paid very little in comparison and had quite a cushy life.

Double standards are becoming a common theme in today’s society and it’s these double standards that divide nations and lead to sub-optimal solutions for national growth. We need governments to close the loop holes and gather the tax income they are due, for the future good of the nation and its people.

References

Duke, S. (2012). Vodafone faces new tax scandal. The Sunday Times, Business, 10^th June, p.1.

Duke, S. (2012). Luxembourg: home sweet home for tax avoiders. The Sunday Times, Business, 10^th June, p.9.