U.S. banking giant switches billions in debt to Britain to avoid corporation tax for 50 years

The Wall Street giant, which employs 5,500 in the City of London, could be eligible for a tax holiday of more than 50 years after making billions of pounds of losses on 'exotic investments.'

The possibility of such a business escaping tax will astonish households struggling with their personal finances.

Merrill Lynch: The U.S. banking giant has charged its losses to its British arm

The collapse of profits among all the banks have led to a dramatic fall in their tax burden --which means a big hole in the Treasury's books.

Merrill Lynch racked up losses of £15.5billion because of the sub-prime meltdown in America.

The losses were booked in its UK subsidiary Merrill Lynch International, because this is the unit through which it conducted its business in exotic financial instruments --repackaged debt.

Merrill can use the losses to offset its tax liability - by as much as £4.3billion - in future years. Accountants say the bank is fully complying with tax law.

Robert Willens, a tax expert, said the move is not common. 'Merrill will have to be able to say that the UK subsidiary was the owner of those securities.

'It does not matter where the derivatives unit is based or where the trades were executed.

'The only thing that matters is who was the owner of the securities,' he told the Financial Times.

The paper calculates that if Merrill starts making profits again at the rate it did in 2006  -  a record year  -  it still won't have to pay any corporation tax for the next 60 years.

Merrill declined to comment. If the move is followed by rivals it could have a huge impact on government coffers.

This week New York mayor Mike Bloomberg said that many Wall Street firms will pay no tax this year due to their losses.

So far this year financial companies across the world have reported writeoffs totalling £250 billion. Economists say this figure could double before the credit crunch comes to an end.

Merrill has offices across London including a financial centre at Paternoster Square by St Paul's Cathedral. which houses two of the largest trading floors in Europe.

Accountants said that the tax structure allows Merrill to offset losses from one part of the business.

John Gu, a tax expert at KPMG International, said: 'It obviously makes commercial sense, though it would be subject to certain legal and tax law restrictions. No company wants the mismatch by losing money on one unit while paying tax on another profitable operation.'

Merrill was founded in 1914 and has become one of the world's biggest banks.