Vodafone, the world's second largest mobile phone company by revenue, paid no corporation tax in Britain last year. The blue chip company has distributed £4.8bn in cash dividends to shareholders in the last 12 months – more than any other British business – but generous tax breaks mean it was able to reduce its corporation tax bill to zero for the second consecutive year.

Vodafone's annual report, published on Friday, also showed the chief executive, Vittorio Colao, collected £11m in pay last financial year. The total included salary, fees, a cash bonus, stock options, cash paid in lieu of a contribution to the company pension scheme and £30,000 in benefits, such as private healthcare and car allowance.

Tough trading in southern Europe, which is bearing the brunt of the economic crisis in the eurozone andwhere Vodafone's businesses' operating profits have contracted by 28%, meant Colao missed some of his performance targets and will take home less than the £15.7m he earned in 2011-12.

Despite being headquartered in Britain, Vodafone regularly pays more tax abroad than it does in its home country. Last year, the group's international tax bill totalled £2.6bn. Instead of being taxed at group level, UK law allows companies to be charged through their subsidiaries. Vodafone has many subsidiaries – the annual report lists 79 of them – each of which is taxed as a separate entity.

In common with many other UK businesses, Vodafone's British operating company is able to shelter much of its profit from tax legally. The firm made a £294m operating profit in Britain last year, but was able to transform that into a loss.

In common with other mobile phone networks, Vodafone claimed back part of the money it has spent on its network, building masts and laying cables. It also claimed back part of the cash it paid the government to buy the airwaves that carry mobile traffic, as well as interest charges on the money it borrowed to pay for them.

"This shows all that is wrong with the current system for taxing corporations, which has made tax almost a voluntary activity," said Prem Sikka, professor of accounting at the University of Essex. "We have the fiction that hundreds of Vodafone subsidiaries all over the world are separate taxpaying entities, even though the company has common shareholders, a common board, and common strategy. It should really be treated as a single economic entity so that none of this profit would escape tax."

Although Vodafone's tax bill for the year was zero, a recalculation of money owed for previous years meant it received a £24m bill from HM Revenue and Customs. This compares to a £4m credit for recalculated tax last year.

In a nine-page document published as a defence of its tax position, Vodafone said it contributed £11.1bn in 2011-12 to public finances in the countries where it operates. This figure includes corporation tax, but also spectrum fees, incidentals such as vehicle excise duty and the income tax collected from some staff.

"Individuals and companies have legal obligations to pay tax," the document states, "but those obligations do not extend to paying more than the amount legally required. Companies also have a legal obligation to act in the interests of their shareholders. Vodafone's shareholders include many of the investment funds relied upon by tens of millions of individual pensioners and savers."

Vodafone's stock price has risen 13% since last June. It is the largest dividend payer in the FTSE 100, thanks to its 45% ownership of the US mobile network Verizon Wireless, which has itself been paying generous dividends to Vodafone.

In light of the economic crisis in Europe, where Vodafone was forced to write down the value of its Italian and Spanish operations by £7.7bn, Colao's pay is to be frozen for a second year running, along with that of most of his top team.

"When considering what, if any, pay increases to award, the committee is always mindful of both wider conditions as well as what is happening elsewhere within Vodafone," Luc Vandevelde, the chairman of the remuneration committee, wrote in the annual report.

Colao's annual salary and fees were worth more than £1m this year. In addition he received £333,000 cash in lieu of pension. He received £8.25m in shares and a £1.313m cash bonus.