The way ahead? - Vodafone

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Vodafone Group Plc
Annual Report 2013
Notes to the consolidated financial statements (continued)
21. Contingent liabilities (continued)
UK pension schemes
The Company has covenanted to provide security in favour of the Trustee of the Vodafone Group UK Pension Scheme whilst there is a deficit
in the scheme. The deficit is measured on a prescribed basis agreed between the Company and Trustee. In 2010 the Company and Trustee agreed
security of a charge over UK index linked gilts (‘ILG’) held by the Company. An initial charge in favour of the Trustee was agreed over ILG 2016 with
a notional value of £100 million and ILG 2013 with a notional value of £48.9 million to secure the deficit at that time of approximately £450 million.
In December 2011, the security was increased by an additional charge over ILG 2017 with a notional value of £177.7 million due to an increase in the
deficit. The security may be substituted either on a voluntary or mandatory basis. As and when alternative security is provided, the Company has
agreed that the security cover should include additional headroom of 33%, although if cash is used as the security asset the ratio will revert to 100%
of the relevant liabilities or where the proposed replacement security asset is listed on an internationally recognised stock exchange in certain
core jurisdictions, the Trustee may decide to agree a lower ratio than 133%. The Company has also provided two guarantees to the scheme for
a combined value up to €1.5 billion to provide security over the deficit under certain defined circumstances, including insolvency of the employers.
The Company has also agreed similar guarantees for the Trustees of the Cable & Wireless Worldwide Retirement Plan and THUS Plc Group Scheme
up to £1.25 billion and £110 million respectively, following the acquisition of Cable & Wireless Worldwide plc.
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 currently involved 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 12 months preceding the date of this report, a significant effect on the financial position
or profitability of the Company and its subsidiaries. Due to inherent uncertainties, no accurate quantification of any cost, or timing of such cost, which
may arise from any of the legal proceedings outlined below can be made.
Telecom Egypt arbitration
In October 2009 Telecom Egypt commenced arbitration against Vodafone Egypt in Cairo alleging breach of non-discrimination provisions
in an interconnection agreement as a result of allegedly lower interconnection rates paid to Vodafone Egypt by Mobinil. Telecom Egypt has
also sought to join Vodafone International Holdings BV (‘VIHBV’), Vodafone Europe BV (‘VEBV’) and Vodafone Group Plc (which Telecom Egypt
alleges should be held jointly liable with Vodafone Egypt) to the arbitration. VIHBV, VEBV and Vodafone Group Plc deny that they were subject
to the interconnection agreement or any arbitration agreement with Telecom Egypt. Telecom Egypt initially quantified its claim at approximately
€190 million in 2009. This was subsequently amended and increased to €551 million in January 2011 and further increased to its current value
of just over €1.2 billion in November 2011. The Company disputes Telecom Egypt’s claim (and assertion of jurisdiction over VIHBV, VEBV and
Vodafone Group Plc) and will continue to defend the Vodafone companies’ position vigorously. Final submissions were submitted on 5 February
2013. The arbitration hearing, previously scheduled to last 15 days, commencing 7 May 2013, has been postponed. No new date for the hearing has
yet been set.
Indian tax case
In August 2007 and September 2007, Vodafone India Limited (‘VIL’) and VIHBV respectively received notices from the Indian tax authority
alleging potential liability in connection with an alleged failure by VIHBV to deduct withholding tax from consideration paid to the Hutchison
Telecommunications International Limited group (‘HTIL’) in respect of HTIL’s gain on its disposal to VIHBV of its interests in a wholly-owned subsidiary
that indirectly holds interests in VIL. In January 2012 the Indian Supreme Court handed down its judgment, holding that VIHBV’s interpretation
of the Income Tax Act 1961 was correct, that the HTIL transaction in 2007 was not taxable in India, and that, consequently, VIHBV had no obligation
to withhold tax from consideration paid to HTIL in respect of the transaction. The Indian Supreme Court quashed the relevant notices and demands
issued to VIHBV in respect of withholding tax and interest. On 20 March 2012 the Indian government returned VIHBV’s deposit of INR 25 billion
(£310 million) and released the guarantee for INR 85 billion (£1.2 billion), which was based on the demand for payment issued by the Indian tax
authority in October 2010 for tax of INR 79 billion (£0.9 billion) plus interest.
On 16 March 2012 the Indian government introduced proposed legislation (the ‘Finance Bill 2012’) purporting to overturn the Indian Supreme Court
judgment with retrospective effect back to 1962. On 17 April 2012 Vodafone International Holdings BV (‘VIHBV’) filed a trigger notice under the
Dutch-India Bilateral Investment Treaty (‘BIT’) signalling its intent to invoke arbitration under the BIT should the new laws be enacted. The Finance
Bill 2012 received Presidential assent and became law on 28 May 2012 (the ‘Finance Act 2012’). The Finance Act 2012 is intended to tax any gain
on transfer of shares in a non-Indian company, which derives substantial value from underlying Indian assets, such as VIHBV’s transaction with HTIL
in 2007. Further it seeks to subject a purchaser, such as VIHBV, to a retrospective obligation to withhold tax.
The Indian Government commissioned a committee of experts (the ‘Shome committee’) consisting of academics, and current and former Indian
government officials, to examine, and make recommendations in respect of, aspects of the Finance Act 2012 including the retrospective taxation
of transactions such as VIHBV’s transaction with HTIL referred to above. On 10 October 2012 the Shome committee published its draft report for
comment. The draft report concluded that tax legislation in the Finance Act 2012 should only be applied prospectively or, if applied retrospectively,
that only a seller who made a gain should be liable and, in that case, without any liability for interest or penalties. The Shome committee’s final
report was submitted to the Indian Government on 31 October 2012, but no final report has been published, and it remains unclear what the Indian
Government intends to do with the Shome committee’s final report or its recommendations.