Tax breaks used by mobile phone networks face scrutiny

Discounts for major UK networks that pay little or no corporation tax will be investigated

Parliament is to open a new front in the corporation tax war by asking auditors to lift the lid on the tax breaks exploited by multinationals in sectors ranging from the internet to infrastructure.

Margaret Hodge, whose public accounts committee of MPs has already tackled Google, Amazon and Starbucks, said the public was being "conned" by the government about the amount that mobile phone networks in particular contribute to the public purse. She is asking government accountants to investigate whether the vast array of reliefs offered by the taxman are being misused.

Her comments were in response to a Guardian investigation published on Wednesday, which reveals that three of the UK's four networks are paying little or no corporation tax while sharing billions in dividends, management fees and royalties with their multinational owners.

By making full use of the many legal tax discounts available for items ranging from investment in infrastructure to interest payments on loans, mobile companies are able to pay rich rewards to executives and shareholders while making little or no corporation tax contribution to the public purse.

Accounts show that Everything Everywhere (EE), Britain's largest mobile phone network, has handed over £3bn in cash and fees to its French and German parent companies, but paid no corporation tax in the UK, since it was created through a merger three years ago.

EE says its accounts are transparent and it takes a responsible approach. Mobile companies argue that they contribute in other ways, by investing in British infrastructure and spending billions in government auctions of spectrum – the airwaves needed to carry mobile signals.

However, a trawl through Vodafone's books shows it is using tax breaks to reclaim half of the £6.2bn it spent at the 3G mobile internet spectrum auction in 2000. This suggests the government is actually giving back to private companies a large portion of the headline-grabbing £22.5bn raised from what was the biggest ever sale of a UK public asset.

Such are the complexities of the tax system that the extent to which networks have been able to claim back money from the Treasury is only now coming to light. Since Orange and T-Mobile merged to form EE, Britain's four network operators have generated £58bn in revenues, with underlying profits of £12bn. While the average corporation tax rate of 25% would in principle force a company to share a quarter of its profits with the Treasury, networks have paid far less than that.

Taken as a whole, the contribution of all four networks to the exchequer is under £1bn in the past three years, with most of that sum coming from just one company, O2. In the period, O2 has paid £669m in tax, but this is still a fraction of the £2.45bn passed to its Spanish parent company Telefónica in dividends. Three, owned by the Hong Kong conglomerate Hutchison Whampoa, is loss-making and has paid no tax. Vodafone has ceded just £156m in UK corporation tax, but paid £6.7bn to other countries during the past three years.

"Never has there been a better case for more transparency from publicly quoted companies," said Hodge. "We are looking at this issue of tax relief and I would like this case included in our investigation. We appear to have been conned [by the government] about the amount of money we've really secured for the sale of spectrum.

"We wanted investment in communications technology, from which these companies make a very good return, and we ended up subsidising them.

"If subsidy is justified it has to be transparent. What is unacceptable is devious ways in which government pretends that it is being commercial, and in reality is giving away taxpayers' money."

Hodge said she would raise the issue of mobile networks with the National Audit Office, which monitors how public money is spent. The NAO is currently deciding the scope of an investigation into tax relief. MPs are keen to see scrutiny of film tax breaks, loopholes exploited by wealthy individuals, and the tax affairs of companies in the water, gas and electricity sectors.

Last year, an Observer investigation found Thames Water and Anglian Water had paid no corporation tax in the year to March 2012 while spending millions on dividends to shareholders.

Mobile networks are among the UK's most cash-rich businesses. With the arrival of fast 4G internet, and with more people owning smartphones and tablets, the amount consumers spend with networks is set to rise steeply. Vodafone is one of the top two dividend payers in the FTSE 100, and its chief executive earned £11m last year. But these riches do not translate into corporation tax. This is because British law allows relief equal to around a quarter of the money spent on items including buying spectrum, installing equipment such as masts, and paying any interest on company debt. Although a company may have cash in the bank, it can report a taxable loss on paper.

The Conservative MP Charlie Elphicke, a urged the telecoms regulator Ofcom to review the spectrum licences of companies not paying their fair share. "They take our money but won't contribute," said Elphicke. He said: "The something-for-nothing culture seems alive and well in the mobile phone industry. Ofcom needs to consider whether companies behaving in this way are fit and proper to hold a licence in the UK."

A spokesman said: "Ofcom's role is to ensure that spectrum is used efficiently to benefit consumers. We do not have any oversight of tax issues."

Paul Farrelly, the culture select committee member and Labour MP, said: "It is time for HMRC to get tough across the board and question arrangements which allow so much to be sent by multinationals offshore, while they are paying little or no tax on their UK operations. These are huge businesses and it's time they paid their fair share into the public purse."

Mobile networks maintain that they act within the law, and that they are rightly benefiting from tax breaks that were designed to encourage investment in critical national infrastructure – the communication networks Britain needs to join the global digital economy.

EE said: "EE has transparent financial accounts and a responsible approach to tax, and strongly contests any suggestion of improper tax conduct. Over the last 13 years, EE has invested more than £16bn building a 21st-century digital infrastructure for Britain. This includes £9bn contributed directly to the UK Treasury for the use of mobile airwaves, an amount 10 times more than any corporate tax that EE would have otherwise paid to date had it not deducted the cost of the airwaves like any other business asset."

Vodafone said it had made just over £10bn in cash since 2000, and paid £7.5bn of that to the exchequer in the 3G sale and this year's 4G spectrum auction. A spokesman said: "Our infrastructure investment in building networks across the UK helps stimulate economic growth and benefits consumers and businesses alike."

O2 said: "We make a profit in the UK and pay corporation tax on that profit, making a significant contribution to Britain's economy."

Three UK said: "In common with all UK-based businesses we are able to offset historic losses against future profits." © 2013 Guardian News and Media Limited or its affiliated companies. All rights reserved. | Use of this content is subject to our Terms & Conditions | More Feeds

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