The recently announced deal for Vodafone to sell its stake in the American Verizon corporation has prompted many commentators to question whether the failure of the transactions to generate tax revenue directly for the UK tax authorities is evidence of avoidance on the part of the participants.
As things stand, the answer would appear to be ‘no’. In fact, if tax campaigners are to be believed and the definition of avoidance is ‘manipulating the tax system to achieve a result not intended by Parliament’ then it would be arranging matters so that a charge arose which would be ‘avoidance’. For, as has been well evidenced elsewhere, there are not one but two acts of parliament in play to ensure that a deal like this does not directly attract capital gains tax in the UK.
The most relevant (that is, the one which actually applies) is the participation exemption which means that when the proceeds of the sale do finally arrive in the UK as a dividend from the Dutch company which currently owns the shares, then there won’t be any tax due at corporate level on those funds.
The second provision is ‘SSE’, the substantial shareholdings exemption. Enacted in 2002, this directly exempts sales of trading companies from the capital gains regime for corporation tax. It’s not a ‘no-gain/no-loss’ provision, deferring the impact of the gain, or a ‘tax at 0%’ provision relieving the gain itself, but rather it’s a wholesale exemption for such transactions – whether they generate a gain or a loss. And because of the underlying economic driver for the exemption, it’s mandatory; if the conditions are met, the treatment applies whether the participants want it to or not. So, if Vodafone were selling today at a loss (as they have done before) they would get no tax allowance for that loss either.
So it seems pretty clear that the UK parliament does not intend to tax these proceeds, if the current law is to be believed. And there seems to be a further inconsistency in some of the criticism levelled at the group. The ‘profits’ here are based on the value of the Verizon shares – a value based on accrued (after tax) profits, and projected (taxed) profits.
To charge tax on proceeds which supposedly reflect that post-tax position looks suspiciously like double taxation. And to then tax the passage of those profits through the group structure (i.e. tax the dividend from Dutch HoldCo to UK) would look like triple taxation – after all, the economic reality is that no additional economic value has been generated in the Netherlands, so why should any tax arise there? And finally of course there will be tax on the proceeds when they make their way out of the UK parent to shareholders as dividends, although the imputation credit system would at least avoid the spectre of quadruple taxation.
So as things stand, the ‘economic reality’ argument might suggest that the proceeds making their way around the world have already effectively been taxed in the trading company that has generated them. Even if not, and some extra charge were due, none of the jurisdictions involved currently applies that argument, so it is hard to see how the intention of parliament has been avoided in this case. The case for changing the international system of taxing profits has been clearly made, and broadly accepted by those in a position to effect change.
But if there is to be any hope of ending up with a coherent successor to the current arrangements then we need coherent thinking from those trying to influence the process, not empty rhetoric and muddled polemic.