Risk & Economy » Tax » Corporate tax affairs lead to new round of controversy

VODAFONE could attract fresh controversy over tax strategy after it emerged it has claimed £17.67bn in tax losses.

The bulk of that figure – some £15.83bn – comes from its Luxembourg-based subsidiary, and the remainder from Germany. The tax losses have been triggered by its £84bn sale of its 45% stake in America’s Verizon Wireless.

The change in the company’s structure due to the sale meant the accounting rules require a value to be put down on its balance sheet, the company said.

Despite that, the move could draw fresh criticism, given controversies surrounding the company’s tax affairs in recent years, particularly its practice of channelling revenues offshore to low-tax Luxembourg and paying no corporation tax in the UK for the last two years.

In a statement, Vodafone said the decision would “not change the amount of tax we pay in cash anywhere in the world, either now or in the future. It will in fact increase the tax charge number that appears in our accounts each year.”

The statement went on: “International accounting rules insist that we must now recognise our historic losses all in one go. These were mainly incurred on our acquisition of Mannesmann in 2001, despite the fact that these can only be utilised over many years. These are real losses suffered by our shareholders on the fall in the value of Mannesmann after we acquired it and have been disclosed to and examined by the tax authorities in a number of relevant European countries. This incidentally has no impact at all on our tax situation in the UK.

“Until now, Vodafone had been recognising these losses steadily but following the agreement to sell our stake in Verizon Wireless, it has become clear we now need to do this in one go.”

Starbucks, too, has found itself back in the spotlight after a £2.7bn compensation payment to Kraft over a contract dispute wiped its tax bill, although the coffee house insists that the £20m it intends to hand over to HMRC after previous tax avoidance allegations will not be affected.

Earlier in the year, David Cameron said the company should “wake up and smell the coffee” over its tax affairs. Shortly after, public accounts committee chairwoman and Labour MP Margaret Hodge described its conduct as “immoral” after global CFO Troy Alstead told the committee that in the 15 years the coffee house had been operating in the UK, it had only been profitable in 2006. In that year, it paid £8.6m in corporation tax.

The multinational coffee chain restated its accounts this year after agreeing to pay $2.7bn (£2bn) to settle a contract dispute with Kraft Foods, The Guardian reports. As a result, a global tax bill of $832m that it had expected to pay for the year to 29 September would instead become a tax credit of $239m. The company has come under fire from politicians and protest groups in the UK for not paying enough tax. Until this year, it had not paid tax in the UK since 2008.

Starbucks is booking the compensation outlay in the year to the end of September and reporting net income of $8m after the charge, down from the previously reported net income of $1.7bn for the year. It told The Guardian: “Starbucks does not have any pre-tax income as a result of the arbitration award; therefore, we do not have a tax obligation this year. For tax purposes, the payment is deductible. We are still evaluating the ruling to determine the time period for deductibility.”

Kraft and Starbucks have been at loggerheads since 2011 when the coffee house ended a contract early that allowed the food company to sell Starbucks-branded coffee in grocery shops. On 12 November a mediator ordered Starbucks to pay Kraft $2.23bn in damages as well as $557m in interest and other fees to end the dispute.