Vodafone 2007 Annual Report Download - page 136

134 Vodafone Group Plc Annual Report 2007
Notes to the Consolidated Financial Statements
continued
Performance bonds
Performance bonds require the Group to make payments to third parties in
the event that the Group does not perform what is expected of it under the
terms of any related contracts.
Group performance bonds include £57 million (2006: £152 million) in
respect of undertakings to roll out 3G networks in Spain.
Credit guarantees – third party indebtedness
Credit guarantees comprise guarantees and indemnities of bank or other
facilities, including those in respect of the Group’s associated undertakings
and investments.
Other guarantees and contingent liabilities
Other guarantees principally comprise commitments to support disposed
entities.
In addition to the amounts disclosed above, the Group has guaranteed
financial indebtedness and issued performance bonds for £25 million (2006:
£33 million) in respect of businesses which have been sold and for which
counter indemnities have been received from the purchasers.
The Group also enters into lease arrangements in the normal course of
business, which are principally in respect of land, buildings and equipment.
Further details on the minimum lease payments due under non-cancellable
operating lease arrangements can be found in note 30.
Legal proceedings
The Company and its subsidiaries are currently, and may be from time to
time, involved in a number of legal proceedings, including inquiries from or
discussions with governmental authorities, that are incidental to their
operations. However, save as disclosed below, the Company and its
subsidiaries are not involved currently in any legal or arbitration proceedings
(including any governmental proceedings which are pending or known to be
contemplated) which may have, or have had in the twelve months preceding
the date of this report, a significant effect on the financial position or
profitability of the Company and its subsidiaries.
The Company is a defendant in four actions in the United States alleging
personal injury, including brain cancer, from mobile phone use. In each case,
various other carriers and mobile phone manufacturers are also named as
defendants. These actions have not progressed beyond an early stage and no
accurate quantification of any losses which may arise out of the claims can
therefore be made as at the date of this report. The Company is not aware
that the health risks alleged in such personal injury claims have been
substantiated and will be vigorously defending such claims.
A subsidiary of the Company, Vodafone 2, is responding to an enquiry (“the
Vodafone 2 enquiry”) by Her Majesty’s Revenue and Customs (“HMRC”) with
regard to the UK tax treatment of its Luxembourg holding company,
Vodafone Investments Luxembourg SARL (“VIL”), under the Controlled
Foreign Companies section of the UK’s Income and Corporation Taxes Act
1988 (“the CFC Regime”) relating to the tax treatment of profits earned by
the holding company for the accounting period ended 31 March 2001.
Vodafone 2’s position is that it is not liable for corporation tax in the UK under
the CFC Regime in respect of VIL. Vodafone 2 asserts, inter alia, that the CFC
Regime is contrary to EU law and has made an application to the Special
Commissioners of HMRC for closure of the Vodafone 2 enquiry. In May 2005,
the Special Commissioners referred certain questions relating to the
compatibility of the CFC Regime with EU law to the European Court of Justice
(the “ECJ”) for determination (“the Vodafone 2 reference”). HMRC
subsequently appealed against the decision of the Special Commissioners to
make the Vodafone 2 reference but its appeal was rejected by both the High
Court and Court of Appeal. The Vodafone 2 reference has still to be heard by
the ECJ. Vodafone 2’s application for closure was stayed pending delivery of
the ECJ’s judgment.
In September 2006, the ECJ determined in the Cadbury Schweppes case
(C-196/04) (the “Cadbury Schweppes Judgment”) that the CFC Regime is
incompatible with EU law unless it applies to wholly artificial arrangements
intended to escape national tax normally payable. The correct application of
the Cadbury Schweppes Judgment to Vodafone 2’s case is a matter for the
Special Commissioners to determine.
At a hearing in March 2007, the Special Commissioners heard submissions
from both parties as to whether the Vodafone 2 reference should be
maintained or withdrawn by the Special Commissioners in light of the
Cadbury Schweppes Judgement. The Special Commissioners are expected to
rule on this question in the coming months.
In addition to the Vodafone 2 enquiry, on 31 October 2005, HMRC
commenced an enquiry into the residence of Vodafone Investments
Luxembourg Sarl (the “VIL enquiry”). VIL’s position is that it is resident for tax
purposes solely in Luxembourg and therefore it is not liable for corporation
tax in the UK. On 8 December 2006, HMRC confirmed that it had closed the
VIL enquiry.
The Company has taken provisions, which at 31 March 2007 amounted to
approximately £2.1 billion, for the potential UK corporation tax liability and
related interest expense that may arise in connection with the Vodafone 2
enquiry. The provisions relate to the accounting period which is the subject of
the proceedings described above as well as to accounting periods after
31 March 2001 to date. The provisions at 31 March 2007 reflect the
developments during the year, in particular the Cadburys Schweppes
Judgment.
The Company has recently been served with a Complaint filed in the
Supreme Court of the State of New York by Cem Uzan and others against the
Company, Vodafone Telekomunikasyon A.S. (“VTAS”), Vodafone Holding A.S.
and others. The Plaintiffs make certain allegations in connection with the sale
of the assets of the Turkish company Telsim Mobil Telekomunikasyon
Hizmetleri A.S. (“Telsim”) to the Group’s Turkish subsidiary which acquired the
assets from the SDIF, a public agency of the Turkish state, in a public auction
in Turkey pursuant to Turkish law in which a number of mobile
telecommunications companies participated. The Plaintiffs seek an Order
requiring the return of the assets of Telsim to them or damages. The
Company believes these claims have no merit and will vigorously defend
the claims.
31. Contingent liabilities
2007 2006
£m £m
Performance bonds 109 189
Credit guarantees – third party indebtedness 34 64
Other guarantees and contingent liabilities 90 19