New Delhi: Andy Halford joined Vodafone in 1999 and has been group chief financial officer of the world’s largest mobile operator for the last six years. The telco’s revenue of around $65 billion comes mostly from six businesses—the Indian operations being one of them. The firm entered India four years ago as part of its push into emerging markets. Vodafone’s $2.5 billion tax case is set to come up in the Supreme Court next month. The company is of the opinion that the law is on its side and has hence made no provision for any payout. Halford spoke in an interview about the case and Vodafone’s plans in India. Edited excerpts:
What are your focus areas and challenges?
There are roughly three areas of focus at present. Today, roughly one in three people in India do not have a mobile phone and, therefore, there are a lot of people to sell to. So the main focus is how to continue to grow the core voice business.
Second is data. We have only recently got licences for 3G and recently started building the network and launching services—this is a significant opportunity over the next 10 or so years. In Europe, data contributed around $8 billion to revenue last year.
The third is the enterprise space. At present, the business is focused on customers but we see a lot of potential on the enterprise side and are focusing a lot of our resources in that direction.
Tax issues: Vodafone group’s chief financial officer Andy Halford.
There are a couple of challenge areas where we are focused on. One of these is getting clarity on the overall spectrum rules as it is our core raw material. There is actually less available per subscriber than in other countries. There is also clarity needed on whether consolidation of the number of operators will be allowed and by when. There are 14 operators in India, which is large. And the final one for us is on the tax case, which comes to the Supreme Court in the middle of next month.
Give us a bit of clarity on the tax case and where it stands at present?
Globally, countries are trying to encourage inward investment and the general tax principles that have been applied across the world—that if there is a transaction, you look at the place where the transaction occurred and that place’s tax laws apply. In this instance, they are saying you should look at where the entities that sit under the holding company lie and where the physical operations are. We have said that this is not the way we interpret the law and it is not the way India has interpreted the law ever and it is not the way other countries interpret the law either.
If you take Tata buying (Jaguar) Land Rover in the UK from Ford in the US. The UK did not ask Tata to pay tax for that transaction.
The primary issue is that India should see that the transaction is actually an offshore one and hence tax is not liable to be paid in India.The second issue that arises if the first hasn’t held is that if tax is payable then who should pay it. In this case, the company that profited from the sale, Hutchinson, is not being pursued for the tax but the purchaser is being pursued.
We have invested nearly $12 billion for two thirds stake in the business. We are in the process of paying another $5 billion to buy the Essar stake and since we acquired the stake four years ago we have invested another $6 billion in building the networks and acquiring 3G spectrum. This takes the cumulative investment to about $23 billion. We have not taken any money out by way of dividend returns to shareholders.
We have also made some new investments which are dealing with some of our European operations and being run out of India. Overall, otherwise we are very encouraged by what has been happening over the last few years but also very enthused about the future. This being the start of the data era (it) seems a very interesting time to be doing business here.
If there is tax payable, who should pay the tax?
Our principle contention is that there is no tax payable. This has been out position from the very very start. Hutchinson offered the company that was at the very very top (of its portfolio) for sale and it was structured the way it was. It was not us who structured it that way or wanted it that way. It just became like that after years of investment and expansion by Hutchinson. It was the structure that they had in place for years and not specifically for this. We looked at the structure, all the precedents over the years and there was no example ever where that had been taxable previously. Hence there was no question of tax being payable and hence the question of who should pay it became irrelevant.
What would the implications be for the company if the case goes against you?
Obviously, we are hoping that is not the outcome. We would need to stop and see what actually was the conclusion. It’s very difficult to prejudge it. As they say, we have been very committed to investing heavily in the country. We believe there is still a very good future here. And we very much hope that we can find a solution to this through the court process and is one that we can all live with and move forward. As we come out of the court process we’ll see where it gets to. But we’re not sitting here…it’s not our job to be putting a gun to somebody’s head. We’re just saying we believe in our case. We will present our views and we hope that those will prevail.
Now, obviously, it’s for the court to opine, but…and we think this is pretty important because, if I sort of wear a broader hat, the overall issue of investment into countries generally including the recession, has had an impact. The discussion paper the government issued here even a week and a half ago…the level of investment has dropped off quite a lot. We have talked to a lot of funders overseas who are saying this is very unusual. And frankly, until we are clear exactly what the rules are it makes it very difficult for us to know whether we should invest or how we should deal with investments. It is very important that this gets cleared up. I think this is not just an issue for us. It is also an issue in terms of the clarity on inward investment rules in the country.
If the judgement goes against you, will you face any cash flow problems given that you haven’t made any provisions for the payout?
Relative to our investment here, another few billion dollars is significant. By investing $1.5 billion last year, we enabled servicing 40 million more customers. If we are putting that money in, it can be to great effect enabling mobile for so many.
If at the end of the day we have to foot a bill of $2.5 billion, then we have to look at what we do with that. We have invested here and we are going to continue to invest. We have the profound hope that this can be resolved where we are still here and we are still investing, creating employment and bringing in jobs from some of our European activities.
Have you considered settling out of court with the tax department?
I think it has been perfectly clear that if there was going to be discussion, we are prepared to be parties in that. The problem with this is that the amounts involved are very significant. This is precedent setting or precedent reversing. If it had gone that route, then we would not be in court right now.
There are countries looking into ensuring transactions of this nature are in the tax web henceforth – some developing economies have already put in place tax regimes to bring in these changes.
The issue for us is with a clear set of rules… We pay $4 billion of tax around the world. We pay tax that is due. The difficult thing here is that where one set of facts, which have always been interpreted in one way, and in good faith we interpreted them in the same way, there is then a counter that says retrospectively that wasn’t the way of doing it. It should’ve been done differently. The clarity on the retrospective bit is the problem. If we had known that we had to do it the other way and Hutch had known that it had be to done the other way, then it would have been dealt with the other way. Because it is being retrospectively challenged.
Did you underestimate the risk that something like this could happen ?
We have grown our business from nothing over 25 years by a doing a lot of M&A. We’ve done more M&A as a group than many have. And we know that there are rules that we have to follow which vary from country to country and we go through those with a fine tooth comb to understand exactly what the position is.
The way it was being dealt with for the last 50 years was entirely consistent with what was happening internationally. So, sentimentally, do governments want to take their take on transactions? Absolutely. But at the end of the day, it is based upon laws, tax laws, tax rules, etc., and that is what we went through as we have done with every other transaction we have done.
We have never had a situation of the like. Never. Not in any country, anywhere in the world. I think we did exactly the right things. Do I understand that governments want to raise money to fund things? Absolutely. But that’s why they set up tax rules to determine how the rules should apply and what the consequences will be.
When we looked to do the deal we looked at many dimensions – political, commercial, regulatory, etc. Was there a sentimental awareness that the government would like to take some tax off this? Yes. But the determining features as to whether tax will be taken are defined by a set of rules.
And therefore we looked very closely at the tax law. And the advice both internal and external was that the tax law is what would govern it. And therefore that’s what we were focused upon.
This principle that you have to look at where the underlying assets are is the prevailing principle – which is not the norm – is incredibly complicated. If I own, personally, a share in a group that is multinational and has operations in 16 countries; if I sell my share and I make a small profit on it, do I then have to work out what then each of those 16 countries thinks is their share of the tax take on the profit I make? It just can’t work that way, and hence why it is the entity at the top, which you have transacted with, is what in international law has been clearly established as being the defining point.
If we were doing a China transaction talks now, we would know exactly what we are up against and exactly what to do. What we don’t understand is that in the past four years, why is it that the tax authorities have not made any attempt to recover the money from the company that made the profit from the deal. Why does it matter that they have no assets in the country at present?
I go back to the Tata example. They are not being pursued by the UK to collect tax that the US could have collected. Bharti for example could be paying taxes to every African country where it has acquired Kuwait’s Zain’s assets. That means so many countries and even more complications.
If there is no clear regime then things become unbelievably complicated. It is the break from tradition that is making things difficult here.
Given that data contributes a significant amount to your global revenues, you don’t have BWA spectrum needed for TD-LTE or 4G wireless broadband services in India. What are your plans for data in India without this spectrum?
Most of our revenues from data are from 3G. Around 20% of our European customers with smartphones are buying data from us.
It will be primarily 3G at the moment but we are fairly technology agnostic as a group. If there are different ways to provide a service, we will do that. We have not invested in Wimax in many markets around the world. We obviously believe the wide broadband markets that 3G can offer will survive. Selectively, we will use all the technologies and especially where spectrum is scarce we will mix and match as is appropriate but 3G is what we are most focused upon including in India.
What do you plan to do with the 5% stake you hold in Bharti Airtel?
When they offer a decent price to us we will be happy to sell it to them. You are second in terms of revenue share in the country but margins are still tight. Are there any plans to review the level of aggression you have in the market?
At this time we want to increase our share of the market and that involves some increased investment. Particularly at a time when the new entrants are still quite frail, we think it is absolutely right to be taking share.
We make about 25% margin here while at the group level it’s around 32%.
Over a period of time, as the scale of the business increases, we are hoping that we can get closer to the 30% mark on the margins.
We have grown our (revenue) market share by a percentage point a year over the past four years. In fact we grew about 1.8% last year and we are very comfortable with that gain. There is nothing wrong with the recipe we are using.
What are you key learnings from you data business globally that you plan to implement in India?
One is that we need to have a network, which has sufficient quality to do data things to a reasonable standard. We need to invest in the network because if you get a bad experience with the data network, it’s usually far worse than if it was with a voice network.
Second one is really about having phones that are both capable and affordable. In Europe, we have had the capable phones but they are quite expensive. What we need to do, particularly here, is make sure that we get the price point down significantly so that they are affordable and hence when people have got those in their hands, they can share the data experience. These two are particularly critical.
If you go back to the height of the recession, we continued to invest in networks and in most of our big markets we have got the lead or shared lead in terms of data usage.
What are you plans with your tower assets in India?
The separation of the towers assets needs a set of approvals and needs to go through a certain process. It is going through a process at present and we have no reason to believe that those will not complete satisfactorily and we will then end up with a separate tower company from the main operating company. A couple of high courts in the country have refrained from giving approval on the hiving off but I think that is more an issue of giving more information so they can form a view.
For the moment, we are taking it a step at a time. To sell them off in the future, we need to actually get them separated first. As with Indus Towers also, an IPO is not something we rule out. But to go ahead we need more clarity on some of the regulatory issues.