The FT has reported this morning that:
US tax authorities are targeting cross-border finance deals worth billions of dollars between leading US and UK banks as they step up efforts to clamp down on abusive tax avoidance, a joint investigation by the Financial Times and ProPublica, the not-for-profit news organisation, has found.
Four US banks — BB&T, Bank of New York Mellon, Sovereign (now part of Santander of Spain), and Wells Fargo — are in turn suing the US government over more than $1bn in tax credits that the Internal Revenue Service has disallowed over the past decade. Washington Mutual has settled a similar dispute and Wachovia is pursuing an administrative complaint over a deal.
The UK's Barclays emerges as a pivotal promoter of the complex cross-border deals, which the IRS claims were designed to generate artificial foreign tax credits.
The cases have become a crucial early battleground between the US and multinational banks and companies in the wider debate over so-called tax arbitrage, and whether companies exploit gaps between international tax systems to benefit their bottom lines.
The best link to their analysis is here.
The deals were complex, deliberately structured, are claimed to be legal (which I don't doubt) but arte being challenged because legal they may be, but tax credit loss generating they are not according to the IRS. Clearly I can't decide that, but I have strong inkling they're right.
I'm interested to note that not only were Barclays purveyors, at considerable cost to HMRC (so please don't tell me there's no tax gap now, or that it's not much bigger then the paltry sums HMRC say it is when these deals alone are meant to have cost $800 million to HMRC - and that's just one set of deals in one bank) but that KPMG are named as designers alongside them.
The analysis is all in the linked article. I won't repeat it.
But what this does prove is three things:
a) The FT things tax avoidance is real
b) It thinks it is abusive
c) It thinks it is extraordinarily costly
d) It thinks it is deliberate
e) It thinks it can be stopped
I think all are important.
I rest my case.
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Richard you say, “at considerable cost to HMRC” … the FT say “the UK Exchequer appears to have received a net tax benefit.” Apologies if I am missing something obvious but I fail to see how both you and the FT can be correct and also fail to see how you can propose such a statement given what the FT writes on its front page. Can you throw any relevant light on this apparent mismatch?
The FT says this cost HMRC $800 bn
I refer to that
Ask them how they come to the conclusion losing $800 bn is a net ebenfit
It’s in the ProPublica article too:
“There is no sign that the U.K. authorities are challenging STARS deals, and the U.K. appears to have had a net tax benefit from them.”
The key word being net: tax is paid in the UK to generate the tax credits in the first place.
No-one is trying to say that this isn’t avoidance, nor condoning it – simply that the avoidance was to avoid US, rather than UK taxes in this specific case.
I also take note note that the FT refers specifically to “abusive tax avoidance”.
Therefore expressly or tacitly acknowledging the distinction between “acceptable tax avoidance” and “unacceptable or abusive avoidance”.
But all tax avoidance is abusive – that maybe was their point
Richard,
Like you, I believe that all tax avoidance is abusive. By definition, in fact. However, I don’t think this is what the FT were saying. My reading of the sentence in question is that the author is trying to differentiate abusive and non-abusive avoidance. Of course, this renders the word “avoidance” meaningless and lays the groundwork for the ridiculous straw man argument, so beloved by the right, that attempts to tackle avoidance are attacks on personal allowances, ISAs, etc.
Maybe I’m being cynical – otherwise I thought it was a good article from the FT.
Z
They have undoubtedly fallen into that trap which renders all language in this area meaningless – which is precisely why the term tax compliance for planning within the obvious intent of the law makes sense
Richard – Rightly or wrongly, I am sure that these schemes will fall within the appropriate tax legislation. No doubt specialist QC’s opinion will have been sought and received at great expense, probably from the same QCs who also advise HMRC, thus rendering challenge by tax inspectors to be almost impossible.
In the past, during FSA courses, I have asked why these loopholes remain and the immediate answers hinge around sloppy legislation but a more cynical view would be that loopholes are left for a purpose but which are only accessible to those who have at least seven figure sums available.
Two things about QCs: the answer you get depends on the question you ask them and, in court, one of them is always wrong!
Indeed!
Given the uncertainty, I decided to follow up with the FT. Upshot is that this particular transaction is likely tax revenue positive, with the tax paid in the UK by the US bank likely greater than the saving achieved by Barclays. However, probably there are other similar deals going in the other direction that lose money for the UK.
Fair does
They say very clearly UK loses
Bet they don’t do that without thinking
Richard,
A quick question about the legality of avoidance. Apologists for tax abuse relentlessly say that “avoidance is perfectly legal”. My own position has always (or at least since I somehow stopped having anything better to do than think about such things!) been that it’s more correct to say that tax avoidance is legal if it works.
In your blog post, you say of the schemes: “legal they may be, but tax credit loss generating they are not”. I’m interested in your language here, because my thinking would be that, if the courts held that the law actually turned out to prevent the losses being generated as claimed, they would in fact not be legal. I’d be grateful if you could explain your thinking on this. By “legal”, do you mean it’s legal to try, our it’s legal to do something that leads to (what avoidance apologists would probably call) a legitimate difference in interpretation?
Thanks,
Z
I mean legal to try and if it fails not evasion – but just null and void, in most cases at least