Vodafone to Pay 1.25 Billion Pounds in U.K. Tax Case

Vodafone Group Plc, the world’s biggest mobile-phone company, agreed to pay 1.25 billion pounds ($1.93 billion) to the U.K. to settle a decade-long dispute over taxation of its Luxembourg unit.

The deal with U.K. Revenue & Customs calls for 800 million pounds to be paid during this financial year with the rest to be paid in installments over the next five years, Vodafone said today in a statement about its first-quarter earnings.

The company had set aside 3.1 billion pounds to cover payments and interest in the dispute that started about 10 years ago, spokesman Simon Gordon said in a phone interview. Vodafone separately said it returned to service revenue growth on strong sales of Apple Inc.’s iPhone in the U.K. and other markets.

“We obviously settled for less than half of the provision,” Gordon said. “This gives us certainty going forward.”

The dispute, in which the legitimacy of the Luxembourg unit was called into question, involved Britain’s Controlled Foreign Companies laws relating to U.K. corporations that have units in European Union countries with lower tax rates.

“The court’s decision in the Vodafone litigation case established that the U.K.’s Controlled Foreign Companies (CFC) rules can be read as conformant with the principles of EU law,” HMRC spokesman Jan Marszewski said in an e-mail.

Vodafone sued in 2004 to block the tax and lost a Court of Appeal ruling in the case last year.

CFC Rules

The CFC rules, introduced in 1988 to prevent U.K. companies from abusing inconsistencies in EU tax rates, treat earnings at foreign units as U.K. profits. The law makes companies pay the difference between the U.K. tax rate and those where the units outside of Britain are based.

Vodafone had said it wasn’t liable for the tax, because its Luxembourg business was a genuine commercial operation.

“No further U.K. CFC tax liabilities will arise in the near future under current legislation,” Newbury, England-based Vodafone said in the statement. “Longer term, no CFC liabilities are expected to arise as a consequence of the likely reforms of the U.K. CFC regime.”

In 2006, Europe’s highest court, the European Court of Justice in Luxembourg, ruled that the U.K.’s policy of seeking corporation tax from such units was restrictive and can only be justified when the affiliates are “wholly artificial,” or set up for the sole purpose of exploiting differing tax rates across the European Union.