Merrill Lynch switches billions in debt to Britain to avoid paying corporation tax for 50 years

August 17, 2008 by · Leave a Comment
Filed under: Industry News 

50 years sure does seem like a pretty big upside for taking huge losses over bad bets that were placed during our last financial cycle upswing.  We will want to follow up on this to see if anyone tries and challenge this type of tax treatment.

Investment bank Merrill Lynch may not have to pay UK tax for decades.  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.

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 FT.

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.

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