Vodafone 2024 Annual Report

Independent auditor’s report to the members of Vodafone Group Plc (continued) 130 Vodafone Group Plc Annual Report 2024 Strategic report Governance Financials

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Risk Recognition and recoverability of deferred tax assets on tax losses – Luxembourg

As more fully described in Note 6 to the consolidated financial statements, the Group recognises deferred tax assets in accordance with IAS 12 Income Taxes, based on whether management judges that it is probable that there will be sufficient taxable profits in the relevant legal entity or tax group to allow the recognised asset to be recovered. A deferred tax asset in Luxembourg of €16,714 million (FY23: €16,269 million) has been recognised in respect of losses, as management concluded it is probable that the Luxembourg entities will continue to generate taxable profits in the future against which the deferred tax asset will be recovered. Management estimates that the losses will be utilised, and the related deferred tax asset recovered, over a period of 52 to 57 years (FY23: 35 to 39 years). The Luxembourg companies’ income is derived from the Group’s internal financing, procurement and roaming activities. The forecast future finance income can vary based on forecast interest rates and intercompany debt levels, in particular with Vodafone Germany, which in turn impacts the timeframe over which the deferred tax asset is forecast to be recovered. Furthermore, during the course of the year, the group recognised an additional €1,019 million (included within the €16,714 million above) of deferred tax assets in Luxembourg, in respect of losses that were not previously recognised, on the basis that it is now considered more likely than not that the related €4 billion of losses would not be successfully challenged by the European Commission under state aid rules. Auditing the Group’s recognition and recoverability of deferred tax assets in Luxembourg is significant to the audit because it involves material amounts, and the judgements and estimates in relation to future taxable profits and the period of time over which it is expected to utilise these assets, results in increased estimation uncertainty. Our response to the risk Audit procedures on the recognition and recoverability of deferred tax assets on tax losses in Luxembourg were performed by the primary audit team and its tax professionals, with support from Luxembourg tax and transfer pricing specialists for certain procedures. We obtained an understanding and evaluated the design effectiveness of management’s controls around the recognition and recoverability of deferred tax assets in Luxembourg, including the calculation of the gross amount of deferred tax assets recorded and the preparation of the prospective financial information used to determine the Luxembourg entities’ future taxable income. To test the recognition and recoverability of the deferred tax assets in Luxembourg, with the support of tax professionals and tax specialists, our audit procedures included, among others; – assessing the existence of available losses and evaluating management’s position on the recoverability of the losses with respect to local tax law and tax planning strategies adopted; – in respect of the additional €1,019 million deferred tax asset recognised in the year, we reviewed the legal advice obtained by management and met with the Group’s external legal counsel to consider their interpretation of recent legal rulings in respect of recent European Commission state aid cases in Luxembourg and their application to the Group; – evaluating the forecast finance income by, on a sample basis, recalculating income with reference to underlying agreements, comparing future interest rates utilised in the forecasts to relevant external benchmarks and the assumed projections in intra-group debt levels for consistency with our understanding of relevant guidance in respect of transfer pricing of financial transactions; – assessing whether contrary evidence exists that is not consistent with either management’s stated intention that the financing structures, as projected, as well as the debt levels in Vodafone Germany, will remain in place or that it is probable that sufficient future taxable profits will exist; – assessing the reasonability of forecasted procurement and roaming taxable profits utilised in management’s assessment, by considering historical forecasting accuracy, changes in pricing models, and with evidence obtained from other areas of our audit; – performing sensitivities to understand the impact of changes in key assumptions of intra-group financing levels and forecast interest rates, on the utilisation timeframe given the Group does not currently recognise deferred tax assets which are forecast to be used 60 years beyond the balance sheet date; and – evaluating the adequacy of the disclosures in respect of the recognition of the deferred tax asset, including as it relates to the evidence supporting the recognition, judgements in respect of the utilisation profile, including longer term uncertainties and the key drivers of changes in the carrying value of the asset and the utilisation period. Key observations communicated to the Audit and Risk Committee We agree with the recognition of the deferred tax assets and consequently the long recoverability period, on the basis of forecast profits, which are considered probable, given the commercial rationale and management’s intention to retain current activities in Luxembourg and the debt levels in Vodafone Germany, over the longer term, and the track record of historical profitability in the Luxembourg operations. The increase in the period of utilisation in FY24 is consistent with expectations of future interest rate reductions, driving lower forecast taxable profits on forecast financing activities. Changes in key assumptions, in particular a plausible reduction in the level of intra-group debt levels with Germany, could lead to an increase in utilisation period beyond 60 years. The Group does not currently recognise deferred tax assets which are forecast to be used 60 years beyond the balance sheet date and consequently, should the assumptions change, a different conclusion could be reached in respect of the level of deferred tax asset recognised. We consider that the disclosures included within Note 6 to the consolidated financial statements acknowledges both the judgement made in respect of the timing and profile of the utilisation of the losses in the short to medium term and the longer-term uncertainties in relation to the carrying value of the related deferred tax asset.

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