Vodafone's Tax Appeal Rejected By UK Supreme Court

by Robin Pilgrim, LawAndTax-News.com, London

Wednesday, January 06, 2010

In a little-publicized ruling, the UK Supreme Court has refused to hear a legal appeal launched by mobile telecommunications firm Vodafone against a GBP2.2bn (USD3.5bn) claim by HM Revenue and Customs (HMRC) for unpaid corporation tax relating to its takeover of German telecoms company Mannesman in 2000.

In its decision, the Supreme Court, which replaced the House of Lords as the UK's highest court last year, ruled that Vodafone could not pursue its case, which argued that a previous European Court of Justice ruling should allow it to ignore rules which HMRC uses to stop groups paying tax on overseas profits at lower rates than the UK corporate tax rate.

The case dates back to 2002, after Vodafone set up Vodafone Investments Luxembourg Sarl (VIL) to dispose of its shares in Mannesman. VIL is also used to circulate cash and profits around the group, and as a vehicle to fund other acquisitions.

The case rested on the court’s interpretation of the UK’s controlled foreign companies (CFC) regulations. These rules seek to ensure that the group pays tax at no less than the UK tax rate, even if the subsidiary is tax-resident in a jurisdiction with a very low tax rate.

In May 2009, the Court of Appeal overturned a decision by the High Court in 2008 that Vodafone did not have to pay UK corporation tax on income attributed to VIL.

The Court of Appeal argued that the UK’s CFC law should be interpreted as if it had a new exception for companies established in the European Economic Area (EEA) which carry on ‘genuine economic activities’ there, meaning that the CFC rules would still apply to companies operating outside the EEA and also to EEA companies without genuine economic activities.

According to law firm McGrigors, the Supreme Court's decision to throw out the case was unexpected, as most tax specialists had anticipated that, given the potential ramifications of the case, the Supreme Court would review the matter.

“This shows that the Supreme Court will not hear cases simply because of the amounts at stake," observed Rupert Shiers, a partner at McGrigors.

Shiers added that Vodafone had won a "convincing" victory in the High Court in 2008 and can be "entitled to be surprised and very disappointed not to be allowed their day in court”.

“HMRC will see this as a major victory," he noted. "They were shocked to hear people arguing that once the ECJ intervenes to say that a piece of legislation is not quite right, the whole legislation is poisoned and it simply falls away. The courts have now said very clearly that you should just cut out the infection and leave the healthy parts intact.”

"The downside is that HMRC may now go back to making every effort to ignore decisions from the ECJ," Shiers concluded.