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Bank uses US losses to take 60-year tax break
Simon English, City Correspondent15 Aug 2008
Merrill Lynch might not pay any corporation tax for the next 60 years, it emerged today.
The giant American investment bank, which employs thousands in the City, has made losses of $29 billion (£15 billion) for its exposure to the US subprime mortgage crisis.
But it has charged the amount to its British arm, meaning it can offset the losses against corporation tax for decades to come.
Accountants say that the move, which is set to spark anger among ordinary taxpayers, is legal but unusual.
Merrill Lynch made dramatic writedowns on investments linked to the US housing market. With millions of Americans now struggling to keep up mortgage repayments, the investments have sunk in value causing an economic crisis across the globe.
All big banks have suffered, but so far Merrill is the only one to charge the entire loss to the UK. The move will reduce payments to the Government at a time when its finances are in disarray. It will also raise eyebrows in the City and cause consternation at the Treasury.
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.
Reader views (8)
If these losses were UK based then it would be acceptable but if these profits were made solely in the US then the offset should be made in America taxation.
- Ravi Shankar, London, 18/08/2008 10:00
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If Merrill Lynch booked all its profits in the UK and hence paid the applicable tax then it's fair and reasonable for them to book the losses here too.
- Ian, London, UK., 17/08/2008 09:39
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Good Luck Merrill - I have no connection to them but they have employed tens of thousands in London and brought much prosperity over the years to the UK economy. If the tax laws say this is bona then they don't pay tax, simple...it would be a disgrace to change the law in retrospect, which would be typical of this partially elected mob of career politicians, who would have difficulty running a day nursery for the over 5's.
- Bondy, Spain., 16/08/2008 18:36
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It's a deafening silence when the Government is raking in massive corporate tax, dividend tax, income tax on all those big salaries and bonuses, and, let's not forget, all that VAT on what investment bankers spend their money on. Oh, and London's banks are the biggest employers in the country too. For the last 10 years banking has kept this country buoyant and improved the standard of living for all.
Come on people, you may not like banks but you have to admit how much the financial industry has done for the country. The economic cycle is on a downward move, but that was always going to happen sooner or later. Perhaps whinging would be best left directed towards a Government that has ridden the top of the cycle and landed the country with even more national debt than when the up cycle started!
Rather than taking the view that tax payers will be subsidising the non payment of bank tax we should be asking the Government to tighten their belts on spending!
- Rachelle, London, UK., 16/08/2008 11:52
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Change the law, why let them trade in this country if they do not want to pay taxes.
- Maggie, London, UK., 15/08/2008 21:44
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It just shows that the bank do what either they want, when either they want, with who either they want. I am sure they have shredded lots of paper to make the move possible. Meanwhile, the treasury will be helping them when the banks cry deficit, and the taxpayer will fit the bill once more one way or another. For the next 60 years, who do you think is going to fill the coffers?
In my small world, like most, I pay 19% instead of 12% interest on my authorised overdraft, simply because I don't deposit £1000 a month. So as usually the poorer one is, the more one pays. But when it comes to corporation, I am still the one paying for them, even when the dudes in charge, receive millions in bonuses, for running a deficit business. I am definitively tired of subsidizing the banks, who are just contributing to poverty all across the planet.
- Lauren, London, UK., 15/08/2008 21:10
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Legal it may be, but it is wrong. Why should losses incurred by a US Bank be subsidised by British taxpayers. What an absolute disgrace, the law has to change!
- Giles, Herts, UK., 15/08/2008 20:15
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I can't see the government finding any problem with this. They make no secret about going the extra mile to help the City be the premier financial centre in the world. Now we know a little more about what it takes.
- Tim, London, UK, 15/08/2008 15:08
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