Big banks targeted by IRS on tax breaks

Extrait de: Big banks targeted by IRS on tax breaks, By Vanessa Houlder and Megan Murphy in London and Jeff Gerth in Washington, September 25, 2011

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, a non-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.

Foreign tax credits are intended to prevent taxpayers from being taxed twice. Some of the deals now cited by the IRS involve a single payment of tax by a company in one country, yielding credit and benefits for two taxpaying companies in two countries.

Documents in the IRS cases portray financial institutions and their counterparties as symbiotic partners in transactions that played off one country’s tax laws against another’s. At issue is whether the deals improperly lightened US banks’ tax burdens.

The STARS documents

Browse the database of documents, drawn from court filings and publicly available documents relating to the FT-ProPublica tax investigation.

The US banks all contend that the transactions – known as structured trust advantaged repackaged securities, or “Stars deals” – were legitimate cross-border lending arrangements. All six US banks declined to comment. Barclays said it would not comment on “client matters.” “Barclays complies with taxation laws in the UK and all the countries where we do business.”

The FT and ProPublica analysis of court filings and IRS documents shows that Barclays realised at least $800m in tax benefits from the UK government through Stars deals that it then shared with the US banks in the form of low-cost loans.

The multi-step transactions ultimately left the US government fighting the banks over more than $1bn worth of tax receipts it claims it was owed, while the UK Exchequer appears to have received a net tax benefit.

Foreign tax credit deals are just one example of how tax arbitrage has been profitable for global financial institutions over the past two decades. Participants, includiCharl, gng bankers, lawyers, accountants and academics say the practice is an inevitable by-product of differences between national tax systems.

Legal experts say global coordination and simplification of tax laws are needed to ensure that US and European countries are collecting all the revenue they are legally due. “You need a broad systemic solution,’’ said Michael McIntyre, a professor at Wayne State University Law School in Detroit who has testified before Congress on international tax avoidance.

That may be unattainable given that countries see some arbitrage as helpful to attracting investors and some governments even encourage it, experts say.