Post by Sapphire Capital on Sept 15, 2008 0:33:39 GMT 4
IRS threatens to crack down on derivatives tax
Source: Joanna Chung in New York
September 12 2008
US enforcement officials will crack down on Wall Street banks that use abusive derivatives transactions to help offshore clients avoid taxes on stock dividends, the head of the US Internal Revenue Service said yesterday.
"We will challenge sham transactions that have no other economic purpose than tax avoidance, Douglas Shulman, IRS commissioner, told a hearing of the Senate permanent sub-committee on investigations.
"People should not take comfort that because we haven't challenged transactions in the past that we won't challenge them in the future," he said.
Congressional investigators, in a 77-page report, accused banks of developing strategies enabling investors to avoid paying 30 per cent withholding tax on income by treating dividend payments as returns on so-called equity swaps and stock loans.
Such transactions deprived the US government of billions of tax dollars over 10 years, said Mr Levin, who sharply criticised the IRS for failling to stop such transactions: "If the IRS tells them to stop they would stop."
The report, citing numerous e-mails and internal documents, describes transactions involving Lehman Brothers, Morgan Stanley, Deutsche Bank, Citigroup, UBS and Merrill Lynch and a number of hedge funds.
At the hearing yesterday, executives from Lehman, Morgan and Deutsche defended their firms, saying they had complied and continued to comply with existing tax laws. John DeRosa, Lehman global tax director, said rules on swaps and stock loan transactions are "clear . . . the transactions the sub-committee is reviewing do not attract US withholding tax".
"There are many reasons, totally unrelated to withholding tax, why clients use these instruments . . . most of Lehman's equity swaps and stock loans have nothing to do with US withholding tax efficiency."
Andrea Leung, global head of synthetic equity finance at Deutsche Bank said: "We do not market swaps primarily for dividend enhancement."
However, executives from three hedge funds testified that tax savings was one of the main reasons for participating in such transactions and that many firms,
marketed strategies to avoid dividend tax to their companies.
"Without those tax savings, many would not have occurred," said Richard Potapchuk, director of treasury and finance at Highbridge Capital Management.
Senator Norm Coleman said: "While the activities may not rise to the level of criminal tax evasion, there is no doubt some institutions have taken advantage of ambiguities in tax law and pushed the tax avoidance envelope too aggressively."
Source: Joanna Chung in New York
September 12 2008
US enforcement officials will crack down on Wall Street banks that use abusive derivatives transactions to help offshore clients avoid taxes on stock dividends, the head of the US Internal Revenue Service said yesterday.
"We will challenge sham transactions that have no other economic purpose than tax avoidance, Douglas Shulman, IRS commissioner, told a hearing of the Senate permanent sub-committee on investigations.
"People should not take comfort that because we haven't challenged transactions in the past that we won't challenge them in the future," he said.
Congressional investigators, in a 77-page report, accused banks of developing strategies enabling investors to avoid paying 30 per cent withholding tax on income by treating dividend payments as returns on so-called equity swaps and stock loans.
Such transactions deprived the US government of billions of tax dollars over 10 years, said Mr Levin, who sharply criticised the IRS for failling to stop such transactions: "If the IRS tells them to stop they would stop."
The report, citing numerous e-mails and internal documents, describes transactions involving Lehman Brothers, Morgan Stanley, Deutsche Bank, Citigroup, UBS and Merrill Lynch and a number of hedge funds.
At the hearing yesterday, executives from Lehman, Morgan and Deutsche defended their firms, saying they had complied and continued to comply with existing tax laws. John DeRosa, Lehman global tax director, said rules on swaps and stock loan transactions are "clear . . . the transactions the sub-committee is reviewing do not attract US withholding tax".
"There are many reasons, totally unrelated to withholding tax, why clients use these instruments . . . most of Lehman's equity swaps and stock loans have nothing to do with US withholding tax efficiency."
Andrea Leung, global head of synthetic equity finance at Deutsche Bank said: "We do not market swaps primarily for dividend enhancement."
However, executives from three hedge funds testified that tax savings was one of the main reasons for participating in such transactions and that many firms,
marketed strategies to avoid dividend tax to their companies.
"Without those tax savings, many would not have occurred," said Richard Potapchuk, director of treasury and finance at Highbridge Capital Management.
Senator Norm Coleman said: "While the activities may not rise to the level of criminal tax evasion, there is no doubt some institutions have taken advantage of ambiguities in tax law and pushed the tax avoidance envelope too aggressively."