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back to article Vodafone and Verizon update relationship status: $130bn worth of complicated

Vodafone has confirmed it is in "advanced talks" with Verizon, which has agreed to pay $130bn to buy out its UK partner - and has apparently found a way to avoid paying tax on the windfall too. Tax has been the stumbling block to previous deals. Vodafone has made good money on its Verizon investment – it currently owns 45 per …

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Eh? Selling shares in Verizon in exchange for shares in Verizon

I don't understand. How is selling your stake in Verizon in exchange for stock for Verizon a sale of your part of Verizon? I get the 50% cash bit, but not the shares in Verizon bit. Haven't they just sold 50% of their holding, rather than 100%. Can anyone explain what I'm missing?

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Re: Eh? Selling shares in Verizon in exchange for shares in Verizon

They're swapping shares in the Verizon Wireless business for shares in the total Verizon business. That total business is listed, so they can sell them to the market whenever they want.

Re the no tax being paid. Yes, SSE so no tax in the UK. Thank Gordon Brown for that one.

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Anonymous Coward

Re: Eh? Selling shares in Verizon in exchange for shares in Verizon

In the nineties, Vodafone bought Airtel in the US by using a corporate vehicle based in the Netherlands. Airtel effectively became 'Vodafone USA', then merged its assets with Bell Atlantic's wireless assets, forming Verizon Wireless. Because Bell Atlantic (now called Verizon) also bought GTE and merged it into Verizon Wireless, it was the larger partner, and Vodafone plc, through its Dutch corporate vehicle 'Vodafone USA', ended up with a 45% stake in Verizon Wireless.

Now, Vodafone's Dutch vehicle is proposing to sell this 45% stake back to Verizon, for $60 billion in cash (raised through several banks), another $60 billion in shares, and $10 billion in other securities (probably bonds). Verizon's current valuation is $184 billion, which means that after the transaction's completion, the $60 billion that Vodafone's Dutch vehicle gets in shares give it a 30% shareholding in Verizon themselves. That pretty much shows that Verizon Wireless is a major value driver for Verizon themselves.

And the reason why it's tax neutral for Vodafone is simple. The Dutch vehicle owns 'Vodafone USA'. 'Vodafone USA' has one major asset, its 45% stake in Verizon Wireless. So now that that stake is sold, 'Vodafone USA' ends up with $130 billion in cash and shares, minus $5 billion to the US taxman because of a deferred tax liability from the Airtel days (remember that Airtel was bought by the Dutch vehicle and effectively became 'Vodafone USA'). The cash stays where it is, the shares stay where they are until such time that Vodafone plc decides what to do with it. Because the transaction occurs between two US entities, the UK taxman does not get involved.

According to Richard Peston, the idea is to return much of the cash to investors, which means that for UK investors, the tax liability falls to them for their share of the pot as a capital gain, Vodafone themselves don't have a tax liability.

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They don't want to pay thier taxes but if some anarchists took their offices in the UK apart I bet they would like the police to investigate or have the NHS treat any injured staff.

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Nobody WANTS to pay tax. No, really, no matter what they say, nobody actually wants to pay tax. Most people accept it is something necessary, and the right thing to do .

However why should tax be paid if NO TAX IS DUE.

If you don't like the law of the land, CHANGE THE LAW, not attack the companies undertaking their normal business.

(Anarchists don't believe in law, so if they were to attack anyone I'd expect the Police to try and stop them)

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They are going through shell companies for at least part of the transaction. Thanks to Mr. Brown they may not have had to pay tax on this anyway.

It's the artifical steps taken solely to avoid tax that annoy me.

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Anonymous Coward

Anarchists.....

They would! That's because they're a UK based company with significant business in the UK that pays tax in the UK according to UK law actioned by a democratically elected UK government.

What are you proposing? Some sort of 'pay cops' which only turn out after a democratic vote?

If La Hodge and your 'tax vigilantes" don't like it they should make some new laws. They are, after all, "lawmakers"

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@James 51

So by your reckoning, because someone works at Vodaphone and pays their taxes, they aren't entitled to police protection?

See this is the bit I don't like about greedy, envious gits like you: People pay taxes, not corporations. So long as they pay their taxes they deserve the protection they pay for. What I have a problem with are people who don't pay taxes. Gits who are probably even more obnoxious than you living completely off the work of others, but whom you'll defend because they don't have a job.

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Re: @James 51

It's not greed or envy, I don't like free loaders. The people are entitled to protection of course but vodafone has a history of not paying taxes:

http://www.theregister.co.uk/2013/08/19/vodafone_ireland_tax_hmrc_settlement/

http://www.theregister.co.uk/2013/05/14/uk_firm_subsidiaries_tax_havens/

http://www.theregister.co.uk/2012/06/15/vodafone_tax/

http://www.theregister.co.uk/2012/01/23/vodafone_tax/

http://www.theregister.co.uk/2008/07/07/vodafone_uk_tax_bill_court_case/

http://www.theregister.co.uk/2004/06/08/vodafone_tax_row/

http://www.theregister.co.uk/2004/04/01/vodafone_gets_visit/

By your logic no business should pay any tax ever and everything should fall upon the private individual but there is no way that we could ever support the level of services the state provides even if the tax rate on us was 100%. Companies need to pay their share and they are doing their dammest to dodge their responsibilities as 'citizens'. If a member of a golf club wanted to play but wouldn't pay their green fees, should the still be allowed out on the course?

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Robert Peston over at the BBC has lots of further information.

Apart from the transactions taking place outside the UK (and therefore not being subject to UK tax), even if it did happen in the UK, there is an exemption for large holdings transactions like these. It was introduced by Gordon Brown when he was chancellor. It's going to be interesting watching Labour MPs complaining in parliament about Vodafone not paying tax...

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Robert Peston is an irritation

Most 'financial' journalists know about journalism but know very little about finance. Not surprisingly, he and the BBC have totally neglected to mention the Vodafone shareholder's tax liability in all of this and have, instead, focussed on trying to sensationalise that which is not sensational.

Anyone who has ever bothered to study tax law knows that most jurisdictions - like the UK - effectively treat Corporation Tax as a prepayment of Personal Income Tax. For the benefit of Mr Peston, I will explain.

£100 profit comes into a company and it pays Corporation Tax of £23 to HMRC. It then divdends out the remaining £77 to its shareholder. The shareholder is taxed on the 'gross-up' amount (£77 + £23 = £100) at their marginal tax rate (40%) but receives a tax 'credit' equal to the 'gross-up' (£23). In other words, the shareholder, would ordinarily have a tax liability of £40 but the £23 tax credit means he/she only pays £17. The net result is HRMC receives £40 (£23 from the company and £17 from the shareholder).

Now, if the company doesn't Corporation Tax and it dividends the £100 to its shareholder, then the shareholder is liable on the £100 but there is no tax credit. The shareholder is still liable (at 40%) to tax on the £100 but has no tax credit to reduce his/her liability. Therefore, HMRC still receives £40 (£0 from the company and £40 from the shareholder).

Whether Vodafone, er, "the company" pays Corporation Tax or not, HMRC still gets its £40.

To go about saying "Vodafone's not paying any tax on this" is to miss the point completely. This is why Mr Peston is working for the BBC and not any of the Accounting or Law firms who actually understand UK taxation.

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Anonymous Coward

Re: Robert Peston is an irritation

Sorry, a point of contention here...

Vodafone is a separate legal entity, just like the shareholders all are. Vodafone, as in the legal entity called 'Vodafone plc', does not have a tax liability. The shareholders will, yes, in so far as the tax regime applicable to them allows.

Thus saying that "Vodafone's not paying any tax on this" is financially, legally, and contextually correct. That the shareholders in the UK, who all get a nice slice of the pot, will be liable for capital gains tax, is legally and financially separate from the liabilities that Vodafone incurs.

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Commendable

I commend Vodafone on being able to pump such a large amount of money back into the UK economy but without it being diverted to pay for eavesdropping, paying for nosey councils and various bureaucratic activities that generate nothing for the country.

Anybody who has a private pension plan should welcome it....

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Re: Commendable

I upvoted this on a selfish level since my pension does have exactly that. Neither do I like bureaucratic waste.

I am a bit fed up though of stories which go:

1. Massive profits made

2. (Incomprehensible financial mumbo-jumbo)

3. So we don't pay tax!

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$130bn an illusion

$60bn in cash is real, though with the proviso that it's a drop in the ocean compared to the debasement of both the $ and the £ in recent years.

The rest is in securities, mostly VZ stock, whose value is hypothetical. Try to unload all that stock and you'd find it fetching a lot less than its today's notional value (just like the UK govt's stakes in big banks). And the agreement (if it happens) will no doubt include contractual tie-ins.

As for tax, who is stirring it? Does someone expect the UK govt to take tax on profits made by a US company on business in the US? I expect they'll be looking to minimise tax liability to the US govt, but the UK only comes into it through those UK residents who are shareholders and who don't hold their shares in a tax-avoidance scheme like a pension or ISA.

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