HONG KONG – India is playing a major role in the global crusade against tax crimes and has completed negotiations for 16 new tax information exchange agreements (TIEAs), according to the chairman of the Central Board of Direct Taxes (CBDT) M C Joshi.

The pacts with the Bahamas, Bermuda, the Isle of Man and the British Virgin Islands have entered into force, Joshi told an international tax conference organized by the Associated Chambers of Commerce and Industry of India (ASSOCHAM).

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PARIS – The Task Force on Financial Integrity & Economic Development’s annual conference in Paris discussed the problems of trade mispricing, or transfer pricing abuse, and looked at how to combat it.

Opening the panel on trade mispricing, Sanjay Mishra, of the Indian Ministry of Finance, set the scene of a changing world and a more integrated global economy where multinational companies have shifted operations into developing countries like India.

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The Task Force on Financial Integrity & Economic Development’s annual conference in Paris last week showed how taxpayers could benefit from a more transparent reporting standard, but activists admitted they must do more to engage companies in the debate.

Delegates heard about the harmful impact of tax avoidance on the developing world and the need for country-by-country reporting to tackle the problem.

Xavier Granet/Task Force

Research from the OECD shows 60% of world trade takes place between the member companies of a corporate group and where a significant number of these subsidiaries are located in opaque or tax havens it can be difficult to determine whether companies are paying the right amount of tax in the countries in which they operate.

Richard Murphy, director of Tax Research, argued that it is important to know what tax companies owe, where they owe it and the profits and losses they make in each jurisdiction.

“And we want to know how many people you employ and where,” Murphy said. “We want to know who you exploit. That is what this is about, the poorest people in the world.”

But the argument is not just about the poorest people in the world. It is also about some of the richest. As many at the conference recognised, the non-governmental organisations (NGOs) cannot win the debate on country-by-country reporting without convincing multinational companies that transparency is in their interests as well.

Murphy argued for a level playing field where everyone, including companies of all sizes, wins from paying tax, which funds better infrastructure and educated employees.

“If you want to make profit, you pay your tax,” Murphy said.

Join the debate

Activists, however, are a long way from convincing companies to join the debate. The clearest sign of that was when Giuseppe van der Helm, president of the European Sustainable Investment Forum, asked who in the room works for a corporation or in the financial community and not a single hand went up in a room packed with development activists, academics and tax officials.

“Country-by-country reporting is not on our agenda,” said van der Helm, whose group includes some of the world’s largest investors and multinationals. “The challenge is to engage with companies.”

Beyond the basic moral arguments put forward by activists, Heidi Finakas of asset management company KLP Kapital gave one of the most compelling reasons as to why companies should support greater transparency: their investors.

“We invest globally in a huge number of companies,” explained Finakas. “We own a little bit of everything, so we have to rely on the system, on the market. This is why we’ve engaged in this issue. We want to improve the financial system, not just one company.”

Finakas argued that KLP Kapital does believe in the positive effects of country-by-country reporting for developing countries, but for the investment community, the main argument must be financial.

“We believe it would provide investors with better information on their potential investments,” said Finakas.

The benefits

A better understanding of political risk, detail on the value of a company to the economy, easier assessment of asset value and the cost of capital were just a few of the benefits of country-by-country reporting Finakas identified.

Finakas also pointed out that it is important for companies to have good relations with the civil society in which they are operating and this is particularly true in the case of the extractive industries. She highlighted the example of one company who reported quarterly on a country-by-country basis because it found it useful to prove to civil society that it was paying its fair share of taxes when it had been accused of dodging them.

David McNair, principal economic justice adviser at Christian Aid, whose campaign has sought to engage a number of FTSE100 companies, noted the difficulty arguments for country-by country reporting have faced.

“Where we’re missing a trick is engaging businesses and owners,” McNair said.

However McNair did see a changing dynamic on the issue and he argued that the issue has become increasingly important for companies’ corporate social responsibility policies and the risks they face.

On the one hand there is the risk of getting a bad public reputation, where the public will no longer tolerate the traditional defence that distinguishes between legal avoidance and illegal evasion.“Companies like Vodafone are aware of the need for a good tax news story,” said McNair.

He also pointed to the increased risk of litigation where there is insufficient transparency and, perhaps most importantly, he noted a cash flow risk for taxpayers.

“An aggressive tax position is a risk to sustainable profitability,” McNair said, arguing that if a loophole which a company has been able to exploit to legally reduce its tax bill is closed, then the next year, even if the business remains the same, profits will fall. This makes for a volatile business model, which may not put shareholders at ease.

The moral case for country-by-country reporting and its potential benefits for some of the world’s poorest people were strongly presented at the conference. But, while some business leaders will be swayed by civil, political and ethical pressure, the argument for tax transparency will be won not by morality, but by profitability, and dialogue between NGOs and taxpayers is key to this.

“Line managers cannot tell shareholders we have to do it because it’s good,” said van der Helm. “There has to be a business case for it. Fortunately there is.”

 This article republished with the permission of International Tax Review.

Reuters

CARSON CITY, NV – Aaron S. Young, Wayne Andre McMiniment and Richard C. Neiswonger share two things in common.

Each man built a thriving business that helps people set up shell companies, firms with few real operations, in the state of Nevada.

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LONDON – In a sign of growing anxiety about tax competition that costs governments billions of dollars a year, international economic policymakers are exploring the need for a global crackdown on tax loopholes.

Experts at the Organization for Economic Co-Operation and Development are examining tactics that companies employ to exploit different tax rules among countries, and are assessing past efforts to rein in the practice known as tax arbitrage.

Angel Gurría, the OECD secretary-general, recently urged the world’s biggest economies to consider how “to limit the scope for gaming the system with multiple deductions, the creation of untaxed income and other unintended consequences of international tax arbitrage.”

The OECD is worried about the impact of tax arbitrage on competition, transparency and fairness, as well as lost revenue.

Earlier this year, Jeffrey Owens, the OECD’s top tax official, called for cooperation in dealing with the “the most costly and destabilizing instances of international tax arbitrage,” which he said can lead to “lost government revenues, wasted resources, increases in borrowing to finance the arbitrage and increased complexity.”

Past efforts to crack down on arbitrage have been controversial,with big companies accusing governments of trying to act as “global tax policemen.” In 2001, the business-friendly Bush administration criticized an OECD initiative to address what it termed “harmful tax practices,” saying it interfered with the right of countries to structure their own tax rules.

In December 2008, after the financial crisis struck, the Internal Revenue Service signaled a shift in attitude. IRS Commissioner Douglas H. Shulman [1], noted in a series of speeches over the following year that a “dizzying global environment” in tax arbitrage was challenging regulators.

One of the speeches came at a meeting of the OECD [2], whose 34 member states include Europe’s strongest economies, the United States, Japan and South Korea.

“All countries with real economies and real tax systems have a shared interest in reducing the kind of arbitrage that makes income disappear from the tax systems where the economic activity is taking place,” Shulman told an audience at George Washington University in 2009. “Tax arbitrage” encompasses a wide range of complex practices that companies employ to achieve tax credits or savings, often by shifting income among subsidiaries in different countries.

Arbitrage generally has mushroomed in the increasingly globalized economy, although it dimmed somewhat in the wake of the 2007-08 global financial crisis, which hit international capital flows.

Still, an appetite for aggressive tax planning remains.

Earlier this year, the U.K. treasury announced laws to close down “an aggressive tax-avoidance scheme” of “contrived circular transactions” by a dozen large businesses unidentified by the government. Hundreds of millions of pounds of tax revenue were at risk, the government said in a news release at the time.

For confidentiality reasons, the U.K. doesn’t disclose taxpayer identities or offer details about such cases.

The OECD last year highlighted its fears [3] about the ability of banks to use losses accumulated since the financial crisis — an estimated $700 billion, according to the OECD — as a tool for aggressive tax planning.

Among the concerns is “loss trafficking [3]”— schemes in which losses are sold to other companies to reduce their tax payments. In an August report, the OECD also warned about aggressive tax planning that involves the carrying forward of “vast” corporate losses as high as 25 percent of the gross domestic product of some countries. The OECD has also said that multibillion-dollar deals aimed at generating foreign tax credits encouraged a general buildup of leverage and led to tax distortions.

The concern was raised in a 2009 report by then-adviser Geoff Lloyd that pointed to the complex structures involving low-cost loans at the heart of some tax-arbitrage arrangements. Such financing provided “an unintended subsidy for cheap cross-border lending at the expense of the lender’s home state exchequer,” according to the report.

The OECD’s Owens sees tax distortions as possibly stoking financial instability.

Speaking at a Brussels conference in March, he said: “Tax was not among the root causes of the financial crisis. But tax measures may contribute in exacerbating non-tax incentives to financial instability in the form of greater leverage, greater risk-taking and to a lack of transparency.”

Related stories:

• Did Barclays Help U.S. Banks Get Undeserved Foreign Tax Credits? [4]
• Government Claims AIG ‘Gamed the Tax System’ [5]
• Corporations Couldn’t Wait to ‘Check the Box’ on Huge Tax Break [6]
• Documents: Browse the documents. [7]
• Interactive: Tax wars: Looking at STARS. [8] (FT.com)

This story was co-published by ProPublica and the Financial Times.

LONDON / WASHINGTON – U.S. District Judge Patrick J. Schiltz of Minnesota is an educated man. He earned his law degree from Harvard, won a coveted clerkship for Supreme Court Justice Antonin Scalia and taught the law for more than a decade before joining the bench in 2006.But when Wells Fargo, the retail banking giant, and the U.S. Justice Department squared off in his courtroom last year over the legality of a fiendishly complicated tax scheme known as “STARS,’’ even Schiltz quickly realized he was not equipped to parse the facts.“I fear I may finally have met my match,” the judge told the court. “We may need a translator in this case, someone who can help us to understand these complex transactions and understand the complex tax laws to put this into English for us.”

He is not alone. The growth of an arcane, intellectually demanding area of high finance that generated hundreds of millions of dollars for banks and multinational companies is being dissected from Minnesota to Washington, D.C., as the U.S. government pursues what it calls tax avoidance fueled by the use of artificial foreign-tax credits.

STARS — short for “structured trust advantaged repackaged securities” — were deals between U.S. banks and Barclays, one of the U.K.’s premier banks in London, that have come under particular scrutiny in bankruptcy, tax, district and claims courts.

At issue is whether the transactions had a legitimate business purpose or were designed specifically to generate improper U.S. tax credits.

Barclays emerged as a key player in creating strategies that worked asymmetries in tax systems. In the STARS deals in question, Barclays realized at least $800 million in tax savings from the U.K. government — benefits it shared with other parties in the deals, according to an analysis of U.S. court and Internal Revenue Service documents by the Financial Times and ProPublica.

Six U.S. banks — BB&T, Bank of New York Mellon, Sovereign (now a unit of Banco Santander), Washington Mutual, Wells Fargo and Wachovia (now a Wells Fargo subsidiary) — have been battling the government over tax credits they claimed through STARS. In one instance, government lawyers said STARS permitted BB&T to claim $1 in foreign tax credits for every 50 cents in tax, “grossly exploiting the tax laws [1].’’

BB&T, based in North Carolina, responded in court that it participated “to maximize profits’’ and not “to avoid or evade’’ taxes.

The U.S. banks all contend their deals had economic substance because Barclays provided them with billions in financing at below-market costs. But each arrangement involved a complex set of transactions, including creation of a trust and multiple subsidiaries, which also provided significant tax breaks.

The U.S. government, in recent court filings, contends that STARS was a highly complex tax-shelter transaction used by the U.S. banks to generate foreign tax credits. In court filings, government lawyers allege that the BB&T [2] and Wells Fargo [3] deals were a “sham.’’ In Wells Fargo’s case, they assert that STARS was designed so the U.S. bank’s “entire economic profit would be totally and exclusively sourced from U.S. foreign tax credits. [4]’’

Wells Fargo says in court papers [5] that its deal with Barclays was a lawful way to obtain reduced-cost financing for its ordinary business.

The U.S. banks involved in pending cases declined to comment. Washington Mutual has settled, agreeing in bankruptcy court last year to forgo $160 million in claimed tax credits. The other U.S. banks are seeking repayment for disallowed tax credits totaling more than $1 billion.

Barclays is not a party to the cases and declined to discuss client matters or comment on its U.K. tax savings. “Barclays complies with taxation laws in the U.K. and all the countries where we do business,” the bank said in a statement Sunday.

U.S. and British tax officials also declined to discuss individual cases, saying it is forbidden by law. There is no sign that British authorities are challenging STARS deals, and the U.K. appears to have had a net tax benefit from them. One court filing by Bank of New York Mellon says: “Barclays’ transaction structure was reviewed by the U.K. taxing authority.”

Revelations about the deals arise amid a broader political debate about corporate taxes and the ability of U.S. companies to compete globally.

As the 2012 election year looms, President Barack Obama is facing direct challenges from Republicans about how best to reduce the U.S. corporate tax rate — at 35 percent, one of the highest in the world — and why U.S. businesses hold an estimated $1.8 trillion in profits overseas.

The law allows U.S. corporations to defer paying taxes on profits earned elsewhere until they are brought home.

The STARS cases are a high-stakes battle for the IRS, particularly because the tax agency and the Treasury Department gave notice in 1997 that they would issue more regulations on foreign tax credits to curb “abusive tax-motivated transactions.’’ But the IRS and Treasury Department never issued new regulations and in 2004 withdrew the earlier notice.

Participants in the market say they believed the government was signaling then that it would not challenge such deals. So, when the Treasury Department and IRS proposed new regulations in 2007 and the IRS began turning down tax credits, companies were caught unawares.

The STARS disputes have produced a vast number of court documents that offer rarely seen details about the world of tax arbitrage [6] — deals that look to maximize profits by exploiting differences in countries’ tax systems.

More than three-dozen bankers, lawyers and accountants interviewed by the Financial Times and ProPublica would not speak publicly about transactions involving foreign tax credits, saying that to do so could jeopardize their jobs. But all characterized their work on such deals as legitimate and a sort of “cat-and-mouse” exercise: Revenue authorities would close a loophole, and financiers would look for another.

“Bankers looked on it as something to make money with. Young lawyers and accountants looked on it as a game,” one British lawyer directly involved in such deals said. “It is not hard to fool the parliamentary draftsmen.”

How the STARS deals worked

Foreign tax credits are designed in U.S. law to prevent double taxation of companies that do business overseas. Because U.S. companies are taxed on their worldwide income, they are allowed to claim a credit for taxes paid to foreign jurisdictions to keep their tax bills neutral.

But foreign tax credits have long been open to abuse. [7]

In STARS cases, for example, the government contends that U.S. companies pursued “foreign tax-credit generator” schemes to take reap credits even when there was no double-taxation. The tax agency is also pursuing cases involving non-STARS transactions in which companies indirectly borrowed funds from a foreign bank and received tax credits.

Such deals have wound down because of investigations and enhanced regulation and because the global credit crisis changed attitudes toward risk. But a look back at STARS reveals how the deals were born and the zeal of those financiers who have been — and continue to be — eager to push the boundaries of structured finance.

The U.K.-U.S. transactions were crafted with a certain degree of confidence and ease during the heady days of the mid-1990s, when financial firms on both sides of the Atlantic saw the potential for savings, said one participant.

“The U.K. equivalent of a foreign tax-credit generator scheme was a partnership deal,” he said. “What the U.S. calls foreign tax credit, we call double tax relief. What made the U.S.-U.K. deals so attractive were the English language, a foreign tax-credit system and the rules-based legal system.”

Court documents and an IRS legal analysis [8] of one transaction reviewed by the Financial Times and ProPublica show STARS deals generally work like this:

A U.S. bank transfers several billion dollars in income-producing assets to a trust and sets up a subsidiary as trustee in Britain. The bank sells shares in the trust to Barclays but promises to buy them back after a set number of years.

Barclays agrees to provide financing to the U.S. bank for less than the bank’s normal cost of credit, and it routes the money through the trust.

The banks say this structure at its core is simply a low-cost, secured loan. But the IRS says STARS went too far, creating a circular set of transactions that are principally designed to generate artificial tax benefits.

The U.S. bank’s trustee pays British tax on the trust earnings and claims a corresponding U.S. tax credit. Barclays pays some tax as well, but the arrangement also allows the U.K. bank an even larger tax benefit.

That’s because Barclays’ shares give it rights to nearly all the trust income, which the British bank is required to immediately reinvest in the trust. Barclays can deduct this reinvestment as an expense, reducing its U.K. taxes.

Barclays used part of the tax savings to discount the U.S. banks’ borrowing costs and kept the rest. In court filings, BB&T calls this discount an “offset,” while government lawyers call it a “kickback” from Barclays. When the deal expires, Barclays is repaid in exchange for the trust shares.

The STARS deals varied, but Barclays’ financing was always attractive. Sovereign says Barclays offered a loan [7] as much as 3.35 percentage points below normal cost in 2003. BB&T received $1.5 billion at 2.9 percentage points below normal cost in a five-year deal that began in 2002.

Wells Fargo, which received $1.25 billion at 2.50 percentage points below normal cost in 2002, told Judge Schiltz that the Barclays deal saved it “millions of dollars in interest expense each year.”

Other financial firms also participated in structured-finance deals. Barclays is presented in court files as the pivotal marketer of STARS to U.S. banks.

Court documents show Barclays worked at times with the global auditing firm KPMG; in one case, KPMG, the accounting firm Ernst & Young and the law firm Sidley Austin are described as having been involved in the design, development and marketing of the transaction. None of the three firms is the focus of an IRS challenge, and all declined to comment.

In the past decade, Barclays was known for a bold approach to tax arbitrage. The British bank’s structured-finance team was considered among the most aggressive of international moneymakers.

Its Structured Capital Markets unit was led in the 1990s by Roger Jenkins, whose focus on corporate tax planning reportedly made him one of London’s highest-paid bankers. Iain Abrahams, who joined the investing arm of the bank in 1995, was considered the wizard behind the deals, according to a half-dozen people who worked with or did business with him.

Abrahams remains a senior executive at Barclays Capital; Jenkins left in 2009. The government is seeking depositions from at least seven Barclays employees, court files show. The bank would make no employee available for an interview. Jenkins also declined to comment.

‘It became a cozy world’

The IRS and some of its counterparts elsewhere were unaware for years that banks and other financial firms were relying so heavily on foreign tax credits, bankers and officials said in interviews.

American International Group, better known as AIG, is characterized as a pioneer in structuring transactions with foreign tax credits, arranging deals as early as 1993, according to court documents.

At the helm of its development unit was a young Joseph Cassano, the same financier who headed the AIG finance unit that imploded in 2008. Companies such as Hewlett-Packard, the global technology giant, also engaged in the transactions. Banks were the most frequent partners.

His lawyer, Joseph Warin, said in an email that Cassano would not be interviewed.

A turning point came in the late 1990s when banks realized they could do deals with each other. Knowledgeable senior bankers said they were eager to move away from corporate customers, who were less adept at structuring complex deals.

“It became a cozy world,” said one. “You are dealing with your friends. You chat together, play golf together and move around each other’s institutions.”

Over time, the sharp reduction in interest rates encouraged much bigger deals to create the same tax benefits. In the early 1990s, the deals were totaling $150 million to $200 million; by 2003, they were 10- to 20-fold bigger, said two experienced bankers who were active in the market.

Banks also copied each others’ deals. “It was just like the credit boom,” said one prominent financier. Accountancy and law firms were involved, according to marketing documents and court papers reviewed by the Financial Times and ProPublica.

The authorities tried to catch up. In 2004, the U.K., United States, Canada and Australia formed the Joint International Tax Shelter Information Centre to curb abusive tax transactions. Soon after, the IRS was alerted to questionable transactions by its British counterparts within Her Majesty’s Revenue & Customs Office.

The U.K. later passed measures that caused a “large portfolio” of AIG transactions in Britain to be terminated, according to public filings. The United States began its own investigations and was helped by the international effort.

The joint tax center uncovered multiple cases that might have affected the U.S. tax base. The IRS was told about “things we would never have picked up or would have been picked up years down the road,” IRS Commissioner Mark Everson told the Financial Times in 2005.

By May 2006, he informed the Senate Finance Committee that the IRS was “aware of 11 structured-financing transactions with an estimated $3.5 billion at issue.” Not long after that, the IRS began denying STARS tax credits. In 2008, the IRS noted in a memorandum that foreign tax-credit deals had caused a “significant drain on the U.S. Treasury.”

Bankers and advisers say that tax-driven structured finance is now a fringe activity. Bill Dodwell, head of tax policy at the auditing firm Deloitte, said that in the current financial climate, “I don’t think aggressive planning will come back seriously for years and years.”

Dave Hartnett, permanent secretary for tax for Her Majesty’s Revenue & Customs in Britain, sees closer cooperation among tax authorities as helping to quell the deals. But they also recognize the market forces at play, he said.

“There has been increased tax transparency from many banks,” Hartnett said. “But have foreign tax-credit generators been closed down completely? No, I don’t think so.”

The international task force, he said, is still “busy exchanging information.”

–

Vanessa Houlder covers taxation and Megan Murphy covers investment banking for the Financial Times in London. Senior reporter Jeff Gerth is in Washington, D.C.

Related stories:

• Government Claims AIG ‘Gamed the Tax System’ [9]
• Corporations Couldn’t Wait to ‘Check the Box’ on Huge Tax Break [10]
• Momentum Builds for Global Crackdown on Tax Loopholes [11]
• Documents: Browse the documents. [12]
• Interactive: Tax wars: Looking at STARS. [13] (FT.com)

WASHINGTON – Changes to a key anti-bribery law that applies to international commerce, proposed by the U.S. Chamber of Commerce, could have disastrous consequences, hurting multinational firms, human rights, and the U.S.’s place of respect as an early adopter of the legislation, opponents to the changes argued here Friday.

According to a report published by the Open Society Foundation’s (OSF) Open Society Policy Center, proposed changes to the Foreign Corrupt Practices Act (FCPA), corporate anti-bribery legislation passed in 1977, could create loopholes in the legislation so large as to make the FCPA largely useless.

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Reuters

NEW YORK – A spate of spectacular collapses of Chinese stocks listed on American exchanges has cost U.S. investors billions of dollars. The fiasco has sparked multiple investigations. Accusations are swirling in Washington and Beijing.

It all began with an email sent out of the blue a decade ago to a Texas businessman named Timothy Halter.

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WASHINGTON – The Internal Revenue Service is giving more time to Toronto-Dominion Bank (TD), Aegon NV (AGN) and other banks based outside of the U.S. to implement a controversial tax reporting rule.

In guidance issued yesterday on the Foreign Account Tax Compliance Act, the IRS didn’t address some of the central questions that have caused financial institutions to fight the proposal. For instance, one of the rule’s most complex provisions — a requirement to withhold 30 percent from payments that might have indirectly originated in the U.S. — remains in the proposal.

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WASHINGTON, DC – Sen. Carl Levin, D-Mich., and several other senators have introduced a bill to close offshore tax loopholes and strengthen offshore tax enforcement.

The “Stop Tax Haven Abuse Act” builds upon earlier bills that Levin has introduced in past congressional terms, and is a product of the investigative work of the Permanent Subcommittee on Investigations, which Levin chairs (see Senate Probes Offshore Dividend Tax Dodges). Over the years, the subcommittee has conducted multiple inquiries into offshore abuses, including the use of offshore corporations and trusts to hide assets, the use of tax haven banks to set up secret accounts, and the use of U.S. bankers, lawyers, accountants and other professionals to devise and conduct abusive tax shelters.

Read more…