Telefónica in line for massive tax rebate

Telefónica could be in for a bit of a tax windfall – if the return of overpaid taxes can ever be described in such a way.

In 2015, the Spanish group filed a claim that it overpaid corporation tax between 2009 and 2010. According to reports, Spain's Audiencia Nacional (High Court) has ruled partially in favor of Telefónica. However, the Spanish treasury can still lodge an appeal with Spain's Supreme Court, which will have the final say.

This means Telefónica cannot yet pop open the cava and plan how it might spend this welcome injection of funds.

Figure 1: Telefónica's tax dispute has its origins in the heady days of the dotcom bubble in the noughties.
(Source: Reuters/Alamy Stock Photo)

In the original claim in 2015, the operator said it was owed around €1.59 billion (US$1.79 billion), of which it was awarded €702 million ($792 million) plus interest by a separate court (the Tribunal Económico-Administrativo Central or TEAC) in 2019. El Pais said the 2019 interest payment amounted to €201 million ($227 million).

Telefónica could therefore receive a further €800 million ($903 million) plus interest, which would increase the remaining amount owed to more than €1 billion ($1.13 billion).

Bursting the bubble

El Pais also provides the backstory to the affair. Apparently, this tax dispute has its origins in the acquisition by Telefónica's former Internet subsidiary Terra Networks of the Lycos search engine in a stock swap valued at $12.35 billion at the height of the Internet bubble in 2000.

Lycos was subsequently sold to South Korean Internet portal company Daum Communications for around $105 million in 2004 (so not the best deal ever for Telefónica).

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Following various complex bookkeeping machinations, as well as Telefónica's acquisition of more shares in Terra and other changes within the group, tax credits were not recognized. For those interested in tax credits, accounting and Spanish law, check out the El Pais article here.

The Spanish newspaper does come to an interesting conclusion: While the Lycos deal was considered fairly catastrophic at the time, it could now be regarded as a savvy financial play. This is because Telefónica paid for Lycos in shares, not cash, and more than 20 years later could have saved around €2 billion in taxes.

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— Anne Morris, contributing editor, special to Light Reading