Vodafone fights taxman in attempt to escape via holding cos

Vodafone's ugly battle with the Indian tax authorities is by no means its first. It has found itself a target on more than one occasion for favouring complex tax planning arrangements, reports CNBC-TV18's Ashmit Kumar.

The holding company structure has helped many an MNC exploit tax havens and treaties to minimise the tax burden. Experts say the British telecom powerhouse itself has used this route with some success.
Rukshad Davar, partner, Majmudar & Partners, "The holding company structure is a well-established model for companies try to minise the tax burden." Also watch the accompanying video
"They do this by paying full tax in jurisdictions like UK and paying lower taxes in lower tax jurisdictions. Not only Vodafone, but most MNCs employ the 'hold company' structure."
No surprise then, that Vodafone has had more than a few run-ins with various tax departments. In 2000, it acquired German conglomerate Mannessmann for 112 billion pounds. The acquisition and subsequent profits were routed through a subsidiary in Luxembourg.
A claim by the UK tax authorities on these profits under the anti avoidance provisions started a battle that rocked the UK. The battle turned ugly and was laid to rest in 2010 with a settlement of 1.25 billion pounds.
And it has been alleged that the actual tax demand could have been as high as 8 billion pounds. But both Vodafone and the UK tax department call these claims "urban myths".
That's not all. UK-based magazine Private Eye has indicated that the US arm of Vodafone Holdings has received loans from Vodafone's Luxembourg subsidiary. It says these carry a total interest component of USD 12.5 billion taxable in the UK and with a potential income tax yield of over 2 billion pounds.
Vodafone, on its part, argues that as per the UK's EU treaty, attempts to tax profits of subsidiaries based in EU are a violation of the treaty and hence, illegal.
Vodafone has saved a pretty penny through such structures. In FY11, for instance, it paid 1.6 billion pounds in tax in the UK, implying an effective tax rate of 17% as against the actual corporate tax rate of 28%.
But these structures may not work for too long, especially with increasing activist-fuelled public anger against tax sops to large corporates.
HP Ranina, corporate tax lawyer, says, "If companies are making huge profits through capital gains which is unearned income and not taxed, the common man won't appreciate it and will put  a lot of pressure on the government to clamp down on such arrangements"
Vodafone did not respond to CNBC-TV18's queries on its tax battles. But with the retrospective amendment to the Indian IT Act, Vodafone may have no escape hatch this time.