Vodafone Group plc (LON:VOD) is facing condemnation today after a Reuters report revealed the company had failed to pay around £1 billion in taxes in the United Kingdom in the last decade. The telecommunications giant has taken tax credits instead.
Vodafone have managed to collect the tax credits by paying off interest on loans from withing the Vodafone Group. Interest payments are tax deductible in the United Kingdom, and so the company has managed to avoid tax by paying money to itself.
Those credits mean the company may not have to pay taxes in Great Britain for some time to come. Nobody is disputing the legality of the move, though many are questioning its ethical basis, and its fairness. This is not the first revelation in recent weeks that have caused outcry.
British comedian Jimmy Carr was indicted by Prime Minister James Cameron for practising “morally wrong” tax avoidance.” That accusation caused outcry in Britain, and eventually resulted in Mr. Carr withdrawing from his avoidance scheme.
Vodafone refused to answer many of the questions from Reuters due to commercial sensitivity. The firm said it was committed to transparency in its tax matters, but was constrained by the need to maximize shareholder value.
Vodafone’s critics are quick to point out the high level of performance the company is experiencing in Britain, compared to other nations where it is still paying its full taxes. There are several factors at play that might precipitate a public backlash, as in the case of Jimmy Carr.
Britain is currently, like many countries in Europe, undergoing an austerity package to rein in its widening budget deficit. In times where economic hardship is falling on people in a painful way, companies and individuals who appear to be scamming the people are hit out at in the populist media and by the public themselves.
If popular opinion turns against the telecommunications company they may have to change their policies in order to continue with its growth in the United Kingdom. It would not be the first time such a thing has occurred.
Nor is this the first time this year that Vodafone has been embroiled in an international tax scandal. Vodafone India’s acquisition of Hutchinson Essar from Hong Kong conglomerate Hutchinson Whampoa in 2007 is still the subject of tax debates in the country.
The Indian Supreme Court ruled earlier this year that the government had no right to tax the company because the deal and all of its actors were active outside of Indian borders. The Indian finance department disagreed and is now pursuing other options to enforce the payment of a perceived $4 billion liability.
Vodafone’s UK unit has begun to make a loss in recent years as subsidized smart phones and competition have squeezed its margins. Today’s news will probably not be effective, unless there is some kind of public backlash that forces a change in strategy. It is clear that Vodafone’s interest payments were made to avoid tax. What remains unclear is the political will to do anything about it other than condemn.