Wall Street tax avoidance ‘gimmicks’ rebuked
By Joanna Chung in New York and Daniel Dombey in Washington
Published: September 11 2008 03:12 | Last updated: September 11 2008 03:12
Leading Wall Street banks have been using complex derivatives “gimmicks” to help hedge funds and other offshore clients avoid billions of dollars in taxes owed to the government, US congressional investigators say.
A 77-page report by the Senate permanent subcommittee on investigations, to be released on Thursday, says the strategies enabled investors to avoid paying the 30 per cent withholding tax on income by treating dividend payments as returns on so-called equity swaps, stock loans or other derivatives transactions.
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Transactions by Lehman Brothers, Morgan Stanley, Citigroup, Deutsche Bank, UBS and Merrill Lynch are included in the report, which calls for the Internal Revenue Service to crack down on such tax avoidance schemes. Officials from the IRS, Lehman, Morgan Stanley, Deutsche and several hedge funds are due to testify at a hearing on Thursday.
Carl Levin, a Democrat and chairman of the subcommittee, said the use of such derivatives had deprived the government of billions of dollars in taxes over 10 years. The report recounts more than $500m (€357m, £284m) of tax savings admitted to by the companies for the period between 2000 and 2007.
“These are gimmicks which are peddled by American financial institutions [and] designed, concocted and peddled to deny Uncle Sam the taxes that are owed under our law,” he said.
He added the IRS had “pussyfooted” on the issue and that he supported new legislation that would provide equal tax treatment for dividends and “dividend-equivalent” products.
The majority of swaps are legitimate but the subcommittee said some swap transactions were used for the purpose of dodging taxes on dividends.
According to the report, which cites e-mails and other internal documents, Lehman estimated that in 2004 alone its transactions enabled clients to avoid as much as $115m in dividend tax payments.
Citi voluntarily decided to pay the IRS $24m in withholding taxes on swap transactions it had arranged from 2003 to 2005.
Lehman declined to comment. UBS also declined to comment but said it was co-operating with the congressional investigators.
Deutsche said it was co-operating with the committee and believed its “swaps business operates within the letter and spirit of the law”. Merrill said it “acted appropriately under existing tax law” and Morgan Stanley believed it had complied with “all relevant tax laws and regulations”. Citi said its “tax treatment of the transactions at issue is proper under applicable tax law”.
The report recognises that there are ambiguities in how the law should be applied.
Copyright The Financial Times Limited 2008
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