The bizarre tax loophole that could save Vodafone £24 billion

Disrobing Vodafone’s tax strategy.
Disrobing Vodafone’s tax strategy.
Image: Reuters/Mark Baker
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Britain’s Vodafone is reconsidering a plan to sell its 45% stake in Verizon’s wireless business back to the American company. The two telecoms have figured out how to avoid a big tax hit that made the deal unpalatable, and investors like the idea—Vodafone’s stock has risen 8% on the news.

Vodafone’s classy problem? The joint wireless venture has been hugely successful in the thirteen years it has operated, and Vodafone’s stake is valued at some $115 billion. In the US, where corporations pay taxes on capital gains, such a sale would leave Vodafone’s US subsidiary with a tax bill estimated at $38 billion (£24 billion). That level of loss was enough to put a hold on the deal, until Verizon came up with a two-step shuffle to kick the tax bill across the Atlantic.

The proposed structure is simple in concept: Instead of buying the stake from Vodafone’s US subsidiary, Verizon will buy the subsidiary itself. The seller, Vodafone America’s parent company, is an international party, and so US capital gains taxes don’t apply. Sure, there are some minor issues—Vodafone America also has holdings in other countries that the parent company will want to hold onto—but Verizon will simply sell them back to Vodafone’s global holding company, taking care to structure the payments so that it won’t take a capital gains hit itself.

That means the problem, and the profit, leaves the US, and launches into the nebulous world of Vodafone’s corporate holding structures. That sounds good in theory for Vodafone—we saved billions!—but in practice it could lead to other problems for the company. Because keeping the money offshore could invite US tax authorities to investigate the matter, the company expects to return that money to its UK shareholders or use it to fund more acquisitions. The good news for the company is that UK tax law looks favorably on corporate share transfers by exempting sales of significant, long-term stakes in other firms.

The bad news, though, is that the UK is on the warpath against aggressive tax planning, dinging multinationals from Google to Starbucks for their efforts to minimize tax payments that sit in ethical, if not legal, grey areas. Starbucks was publicly badgered into relinquishing several UK tax deductions that cost it some £10 million in additional taxes last year. You’d imagine that government investigators and public activists will be interested in a tax-free multi-billion dollar transaction by one of the UK’s largest companies.