Relations between Vodafone and the German government over the last couple years can best be described as fragile. The high-profile trial of former Mannesmann AG executives, which Vodafone acquired in 2001, is still ongoing in Dusseldorf.
The six senior executives were charged with breach of trust over the takeover, as the executives received bonuses totaling some 57m euros ($70m).
The trial is widely viewed by most outsiders as nothing more than a politically inspired witch hunt, as the long takeover battle for Mannesmann was an emotional issue in Germany, where there was general hostility to one of the cornerstones of the country’s economy being acquired by an overseas mobile phone operator.
Now a move by Vodafone to reduce its German tax bill has reignited controversy over the takeover. The Newbury, UK-based operator wants to offset a 50bn euro ($61.28bn) write-down in the value of its German business against tax, depriving the German state of up to 20bn euros ($24.51bn).
Vodafone is effectively arguing that it paid 50bn euros ($61.35bn) too much for Mannesmann. Under German tax law, a company can claim a credit if it can demonstrate that the value of an acquisition has dropped since the deal was completed.
Vodafone said it needs to reduce the book value of its German acquisition to take account of a sharp drop in telecom share prices since the deal was completed. The operator said offsetting the sum written down against tax is in line with German law, and is common practice in the telecoms industry.
Predictably German politicians are up in arms over the write-down, saying it forces taxpayers to fund the Mannesmann deal. The move comes at a crucial time, as federal German finances are in a very bad way, and the ruling SPD party is trailing in the polls.
Vodafone’s proposal is currently being weighed up by the tax authorities in the state of North Rhine-Westphalia, where the firm has its German base. There is widespread speculation that the authorities in North Rhine-Westphalia may come under political pressure to reject the proposal.
Unfortunately for the German government, most tax experts seem to agree Vodafone is legally entitled to the tax credit. I’m afraid Vodafone has had a very close look at German tax laws and discovered a loophole, tax expert Wolfgang Gehrke told the Deutsche Welle newspaper.
And to top it all, the practice is also carried out by German companies. In 2002, Deutsche Telekom wrote off 21bn euros ($25.76bn) after re-valuing its mobile business in the United States. German power company E.ON wrote off 2.4bn euros ($2.94bn) of the 8.1bn euros ($9.93bn) purchase price of the British company Powergen.
