Tag Archives: taxation

Foreign banks in Britain pay fraction of tax rate

Pedestrian pass the offices of Goldman Sachs in London April 20, 2010. REUTERS/Toby Melville

Pedestrian pass the offices of Goldman Sachs in London April 20, 2010. REUTERS/Toby Melville

By Tom Bergin
December, 2016

LONDON (Reuters) – Some of the biggest foreign investment and commercial banks operating in Britain paid an average tax rate of just 6 percent on the billions of dollars of profits they made in the country last year, a Reuters analysis of regulatory filings shows.

That is less than a third of Britain’s corporate rate of 20 percent. There is however nothing illegal about how they managed to reduce their taxes, and includes using losses built up during the financial crisis to offset current bills.

Seven of the biggest international banks operating in London – Europe’s main investment banking centre – have published profit and tax data ahead of a year-end deadline stipulated by EU law.

Five of them, all U.S. banks, reported a profit – a combined $7.5 billion – and paid corporation tax, or corporate income tax, of $452 million.

Bank of America’s two main UK investment banking subsidiaries paid no corporation tax on combined profits of $875 million. JPMorgan paid $160 million in tax on $3.3 billion in UK profits.

Goldman Sachs paid $256 million tax on $2.8 billion profit, while Morgan Stanley’s main UK unit paid $33 million tax and earned $530 million.

All the banks declined to comment on the data except San Francisco-based Wells Fargo, which reported $2.7 million tax on $34 million profit. It said its objective was to comply with all of its tax compliance requirements.

The British Bankers’ Association (BBA) said the data did not reflect the sector’s full contribution and that, including other taxes and payments, foreign banks contributed about $20 billion to the UK treasury last year.

The British tax authority, Her Majesty’s Revenue and Customs, said the Government had taken steps to ensure banks paid the correct amount of tax.

“Many complex factors contribute to the effective rate of tax paid by corporate businesses,” a spokesman added in a emailed statement.

The finance ministry was not available to comment.

The 6 percent rate is still higher than the average rate of 1 percent paid for 2014 by the 10 biggest foreign investment and commercial banks that reported UK profits and taxes.

British banks also disclose profit and tax amounts but these are largely related to domestic retail activities, so it is not possible to calculate the effective UK tax rate on their commercial and investment banking activities.

Analysts say many other companies pay tax at below the headline rate but only banks are required to disclose tax and profit figures by country, so it is not possible to calculate the rates paid by manufacturers, builders or services companies.

‘ALL-TIME HIGH’

A Citigroup office is seen at Canary Wharf  in London, Britain May 19, 2015.  REUTERS/Suzanne Plunkett

A Citigroup office is seen at Canary Wharf in London, Britain May 19, 2015. REUTERS/Suzanne Plunkett

The opposition Labour Party said the figures showed that the government was still going soft on the banks, years after saving the sector from collapse with taxpayer funds.

“These again look like alarmingly low tax rates for banks which are making eye-watering amounts of money,” said shadow finance minister John McDonnell. “This shows that this government wants to create an environment in which big firms get tax giveaways while everyone else gets spending cuts.”

The data comes as banks in Britain push back against a government decision last year to increase their corporate tax rate to 28 percent this year – a move that was offset by a cut in the levy on their assets.

The BBA criticised the change saying, the government risked making Britain a “less attractive place for banks”.

This week, it said the low corporation tax payments would likely increase in coming years. In any case, it said combining the bank levy, value added tax, payroll taxes and income taxes paid by staff foreign banks contributed 16.8 billion pounds to the UK Exchequer in 2015. “Tax contributions by the banking sector are at an all-time high,” a BBA spokeswoman said.

The levy – introduced in 2011 to help discourage risky borrowing and pay for the crisis-era banking bailouts – raised 3.4 billion pounds in 2015-16, compared with corporation tax payments by the sector of 3.2 billion pounds, the BBA said.

Only one of the foreign banks published data on their bank levy payments. Merrill Lynch International said it paid a levy of $19.2 million last year, down from $47.5 million in 2014.

LAGS AND LOSSES

A man walks into the JP Morgan headquarters at Canary Wharf in London May 11, 2012.  REUTERS/Dylan Martinez/File Photo

A man walks into the JP Morgan headquarters at Canary Wharf in London May 11, 2012. REUTERS/Dylan Martinez/File Photo

Bank of America said in a filing that its Merrill Lynch International unit paid no corporation because of “relief obtained via the utilisation of historical losses brought forward”, largely from during the global financial crisis.

Accounts for other banks’ UK subsidiaries also show that they benefited from using losses built up during the crisis to offset current tax bills.

Last year the government changed tax rules so that such losses may only offset half a bank’s income in any one year, partly explaining the increase in the banks’ effective tax rate compared with 2014.

Other banks including JPMorgan said in the filings that since tax payments often partly cover the previous year’s earnings, the rate paid in a given year may not reflect the amount eventually paid in respect of that year’s profits.

Across the UK banking sector, corporation tax payments are half what they were before the financial crisis, according to the BBA’s own tax survey, published last month.

The drop is not confined to banks, and is echoed across other businesses. The ‘100 Group’ which represents around 100 of the UK’s largest companies said corporation tax payments by its members had fallen over the past decade.

Tax campaigners say some companies also use complex inter-company transactions to ensure profits are actually reported in lower tax jurisdictions to minimise bills.

Banks filings do sometimes show disproportionate profitability in such jurisdictions.

London-based Goldman Sachs Group UK Ltd reported a $194 million profit in the Cayman Islands, which has no corporate income tax, despite employing no staff there.

Citigroup reported twice as much profit at Citigroup Europe Plc, its main subsidiary in Ireland, than at its main UK subsidiary. That’s despite the UK arm employing more people than Ireland, and more senior staff – average wages at London-based Citigroup Global Markets Ltd were $288,000 per head last year compared with $48,000 at Dublin–based Citigroup Europe Plc.

Ireland’s tax rate is 12.5 percent.

Goldman and Citigroup declined to comment.

Copyright Reuters 2016

($1 = 0.8035 pounds)

(Editing by Pravin Char)

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Panama Papers: What are ‘Tax Havens’?

By Tommaso Faccio, University of Nottingham 
April, 2016

The Panama Papers leak sheds some light on the intricate ways in which the wealthy can exploit secretive offshore tax regimes. As well as charging minimal or no tax to residents and non-residents, the main characteristics of tax havens are their lack of transparency and effective information exchange.

As the leaked files of Panama-based law firm Mossack Fonseca show, these havens are used by individuals and companies to stash their cash, away from the prying eyes of civilians or investigators. This is not necessarily because their money has been obtained illegally. In the case of public figures such as politicians, for example, they may want to keep the size of their wealth a secret or hide from their electorates that they or their relatives are legally minimising their tax. To do so, they hide their identity using a number of complex legal mechanisms.

Whether it is a wealthy entrepreneur or a drug trafficker, the tricks used to make their affairs hard to trace are pretty similar. It all starts by incorporating a “shell company” (or a “letterbox company”) in an offshore tax jurisdiction, using the services of a law firm such as Mossack Fonseca. These companies have the outward appearance of being a legitimate business but in reality are just empty shells. They manage the money they receive and hide who owns it. The management is made up of lawyers and accountants, whose only role is to sign documents and allow their names to appear on the company’s letterhead.

The money is received by this shell company from people who wish to hide these funds from tax authorities and the wider public. Very few questions are asked about the source of this money, which can then be used by the shell company to carry out legal activities such as investing in real estate – or illegal activities such as bribing a government official.

The ownership of these shell companies can be easily transferred, through the use of bearer shares and bonds, whose ownership belongs to the person that holds the physical stock certificate. These were abolished in the UK in 2015 and the US government stopped selling bearer bonds in 1982 in a bid to increase transparency. They allow large sums of money to be moved around easily, with full anonymity.

Lack of transparency

The Panama Papers investigation by the International Consortium of Investigative Journalists have already put Iceland’s prime minister, Sigmundur Davíð Gunnlaugsson, under serious pressure. ICIJ has documents that show how his wife owned a British Virgin Islands shell company called Wintris Inc that held millions of dollars in bonds in the three major Icelandic banks, which collapsed in 2008. In 2009, Gunnlaugsson entered parliament but failed to declare his wife’s ownership of Wintris. The electorate was none the wiser due to the lack of information exchange between the British Virgin Islands and Iceland, which ensured that this information was not available.

It is not illegal to have dealings with a tax haven – and in fact there can be very legitimate reasons to conduct business there, such as investing in a hedge or mutual fund. And tax havens are often used by business people in unstable countries where they are at risk of “raids” by criminals or their governments.

In spite of this, the lack of transparency and lack of information exchange can also be used for illicit purposes, including money laundering, bribery, corruption, tax fraud and other illegal activities. Because the beneficial owners of a company are kept secret, the proceeds of crime can be hidden or used for nefarious purposes without any authorities being able to trace it. If law enforcement and other competent authorities had access to beneficial ownership information, they could “follow the money” in financial investigations involving suspect accounts or assets held by corporate vehicles.

The lack of effective information exchange is ensured through secrecy laws that prevent overseas tax authorities from accessing information on the complex structures located in tax havens. A number of countries have bilateral Tax Information Exchange Agreements (TIEA) with tax havens, which enable their governments to enforce domestic tax laws by exchanging, on request, relevant tax information. However, Panama has only signed one TIEA (with the United States).

Panama is far from alone in this business. According to the 2015 Financial Secrecy Index for 2015 compiled by the Tax Justice Network, Switzerland, Hong Kong, the US, Singapore and the Cayman Islands are the top five jurisdictions for secrecy and the scale of their offshore financial activities.

In 2013, The Economist estimated that around US$20 trillion could be stashed in offshore accounts worldwide. Much of this may be used for legal activities – but until there is full transparency and information exchange between tax havens and overseas tax authorities, it is impossible to determine what is the extent of the illegal tax evasion and other criminal activities these tax havens facilitate.

The ConversationCreative Commons

Tommaso Faccio is a Lecturer in Accounting at the University of Nottingham. This article was originally published on The Conversation. Read the original article.

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Facts and Opinions is a boutique journal of reporting and analysis in words and images, without borders. Independent, non-partisan and employee-owned, F&O is funded by our readers. It is ad-free and spam-free, and does not solicit donations from partisan organizations. To continue we require a minimum payment of .27 for one story, or a sustaining donation. Details here; donate below. Thanks for your interest and support.

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