Vodafone & tax

Vodafone's decision to retain its 45 per cent holding in Verizon (NYSE:VZ - news) Wireless has been vindicated in spectacular style. The stake's equity value has risen by perhaps $10bn to $50bn since grouchy shareholders unsuccessfully lobbied for a sale in early 2006.

A key part of Vodafone's defence was that a US exit would create a huge capital gains tax bill of at least $10bn. Now, ahead of Vodafone's annual general meeting on 24 July, activist group Efficient Capital Structures has alleged that Vodafone's position on tax is "disingenuous". A spin-off of the Verizon stake direct to Vodafone's shareholders, could, ECS say, occur under UK law without creating a big tax bill.

Is this accurate? The chances of a tax-free spin off in fact seems fairly slim. First, in order for a spin-off to avoid a US tax bill, Vodafone would need to demonstrate to the US Internal Revenue Service that it would have an "active trade or business" in America. This looks tough: Vodafone has no other major US assets.

Second, if the stake comprised more than three quarters of the value of the "spin-co", Vodafone would need Verizon's permission. This is not a given. Third, under US rules, Verizon could probably not take over the spin-co for two years without Vodafone incurring tax, and after that Verizon would still need IRS permission.

The exact details of any company's tax position are impossible to know from the outside, both because of its likely complexity and because companies are loath to reveal their hand to the tax authorities.

ECS is correct that tax is critical to Vodafone's US position. But it is wrong to suggest that, as a matter of course, companies should be forced to disclose the gory detail of their tax positions. Vodafone's board exists to scrutinize this on behalf of shareholders and communicate its conclusions. At this stage there is no reason to suppose that it is not doing its jobs properly.