DT hits out at Telefonica’s ‘subsidies’

Deutsche Telekom, Europe’s largest telecoms operator, has accused Madrid of unfairly subsidising foreign acquisitions by Spanish companies and is studying whether any help over tax in the takeover of O2, the UK mobile phone company, by Spain’s Telefónica contravened EU law.

Kai-Uwe Ricke, chief executive, said Telefónica’s ability to write off the goodwill of the planned €26bn ($30.5bn) deal thanks to exceptional Spanish tax rules highlighted Europe’s “skewed competitive environment” and was “an important factor” in deterring DT from making a counter offer. He also cited price and potential regulatory difficulties.

Spain’s tax rules have attracted attention elsewhere. But having failed to buy O2 to become the biggest mobile operator in the UK, DT now lacks clear opportunities to grow by acquisition – while Telefónica could use O2 to become a rival in
Germany.

DT’s core profit will remain static next year as it invests an extra €1.2bn to improve mobile and fixed-line businesses, Mr Ricke said. Adjusted earnings before interest, taxes and other items rose 3.7 per cent to €5.5bn between July and September. Net profit of €2.415bn topped forecasts, largely due to one-off gains and tax effects. Net debt fell by €3.7bn to €40.8bn

But investors showed their doubts over the benefit of sacrificing profits in the short term and the shares closed 2.8 percent down at €14.60.

By DT’s reckoning, Telefónica will be able to write off goodwill of €11bn against tax bills and reduce payments to Spain’s exchequer by €4bn, or 15 per cent of the price for O2. “We’re checking whether this is permissible under EU law,” said Karl-Gerhard Eick, DT chief financial officer.

Mr Eick admitted legal action couldn’t stop the tie-up. But DT hoped to stop “tax subsidies for Spanish companies’ strategic expansion” in the future. DT would have to bring any case against Madrid before the European Court of Justice in Strasbourg.

Telefonica would not comment. But other Spanish companies maintain they are just operating according to the tax laws within their own country, and that other jurisdictions would offer their own advantages, such as lower corporate tax rates than Spain.

“It’s not illegal, as any subsidiary of an EU company can profit,” said Christoph Spengel, tax expert at Giessen University. “But it could become a political issue if other states start to resent tax-paying companies relocating.”

European Commission officials said the Spanish tax provision had not been brought to its attention, but argued it was unlikely to be viewed as an illegal subsidy. Tax breaks only broke EU rules on aid if they supported specific sectors or companies – and Spain’s rules on goodwill write-offs crossed all sectors.

The competitive advantage allegedly offered has already become a talking point in France, where Spanish companies are competing to buy three state-owned toll-road operators. It forced the French finance ministry to stress bids would be judged on overall business plans and not on price alone.

Mr Eick said DT had not contacted other companies to discuss the tax advantages of Spanish rivals. Similarly, it was still “too early” to seek help from Berlin. A government official said the administration had no informtaion about the issue. Butthis did not preclude it being raised at EU level in the future.