Vodafone’s 3.8% Taxes on $130 Billion Payday Fuels U.K. Spat

Vodafone Group Plc’s $130 billion payout from exiting its Verizon Wireless venture is largely passing the tax man by.

The company will pay $5 billion in U.S. taxes on the transaction, according to terms of yesterday’s agreement to sell its 45 percent holding in the carrier to majority owner Verizon Communications Inc. Because Vodafone is divesting the stake through its Dutch unit, it won’t pay a penny in the U.K.

U.K. politicians have grilled Google Inc. and Amazon.com Inc. executives on their taxes, and Starbucks Corp. agreed in December to pay a voluntary tax to head off a boycott threat. Vodafone, based in Newbury, England, structured the deal through its holding company in the Netherlands, where it benefited from an exemption rule leaving it with no taxes due there, either.

The lack of British tax is “pretty concerning,” Margaret Hodge, chairwoman of the House of Commons Public Accounts Committee, said yesterday on BBC radio as she asked tax officials to review the transaction. Vodafone “has a duty not to aggressively avoid tax, but to pay its fair due to British taxpayers out of the substantial windfall it is making.”

Even had the sale taken place in the U.K., Vodafone wouldn’t have owed tax to its home government due to an automatic exemption, Robert Willens, a New York-based independent tax specialist, wrote in a report today on the deal. “It was always the case” that just a small part of the transaction would be subject to tax, he said.

‘Moral Responsibility’

“We have a moral responsibility to follow the rules in each jurisdiction,” Vodafone Chief Executive Officer Vittorio Colao said of the tax implications in an interview with Bloomberg Television yesterday.

The split between cash and shares will give Vodafone investors $23.9 billion in cash and $60.2 billion in Verizon stock, a payout structure that allows Vodafone to walk away with no stake in Verizon. The company will be left with about $30 billion that it’s earmarked for investments and cutting debt.

In March, Bloomberg News reported the carriers had discussed options ranging from a buyout by Verizon of Vodafone’s stake in the venture to a full merger of its owners.

“Since our initial investment 13 years ago, Verizon Wireless service revenue has quadrupled,” Colao said on a conference call yesterday. “We have realized an attractive value for our stake in Verizon Wireless, allowing us to make an attractive return of value to shareholders.”

Capital Gains

Vodafone investors who choose to sell the Verizon shares they’ll receive may face taxes themselves on the capital gains, Chief Financial Officer Andy Halford said on the call.

Vodafone shares declined 5 percent to close at 202.50 pence in London. In New York, Verizon’s stock fell 2.9 percent to $46.01 at the close.

The U.S. tax owed is on the assets sold by a Vodafone holding company based there, which held Verizon Wireless shares along with stakes in other assets Verizon wasn’t interested in buying, according to Vodafone’s statement.

“This is not an example of clever engineering, it is pretty straight-forward,” Ian Roxan, director of the tax program at the London School of Economics, said in a telephone interview. “It’s effectively dramatic and you can question whether it’s desirable that companies should be able to effectively defer paying tax on large capital gains like this.”

Voluntary Tax

Companies are typically required to pay a corporate tax rate of 23 percent on gains in the U.K. There’s an automatic waiver, known as the substantial shareholding exemption, that lets publicly traded companies based in the U.K. avoid capital-gains taxes when selling shares in enterprises where the stake is bigger than 10 percent and was held for a 12-month period in the two previous years, according to Her Majesty’s Revenue & Customs.

The U.S. tax means Vodafone is “able to say it’s not a tax-free transaction,” Willens said in a telephone interview. “That’ll be a small solace on the U.K. side. It’s just the way the system works.”

Vodafone was subject to “tax dodger” claims in the U.K. when it settled a decade-long dispute in 2010 over how its Luxembourg business reduced how much it paid in British taxes.

That Starbucks agreed to pay a voluntary tax hasn’t sated lawmakers who called for a panel of both houses of Parliament to hear testimony and review the British corporate-tax system, which “loses much-needed revenue” and is in “disrepute,” according to a July 31 statement.

“Until now they have pretty much been below the horizon; it’s been a standard feature,” said Roxan, referring to the U.K. tax-exemption rules. “We haven’t seen a deal which has so explicitly taken advantage of this. The main gain in this case isn’t being taxed at all.”

Before it's here, it's on the Bloomberg Terminal.