Barclays and KPMG involved in $660m tax ‘sham structure’

Prem Sikka

What are the chances that in the face of public criticisms, big business would curb its tax avoidance practices? Well, not much, as evidenced by a case decided by the US Court of Federal Claims.
Salem Financial Inc v United States relates to a complex financial transactions known as STARS (Structured Trust Advantaged Repackaged Securities). The case involved Salem Inc, a subsidiary of North Carolina based bank, BB&T.

The scheme was designed by Barclays Bank, a major UK financial institution; KPMG, one of the world’s biggest accountancy firms; and Sidley Austin, a US law firm. At the centre of the dispute is a tax liability of some US$660m.

Through collaboration with Barclays, KPMG specialised in developing transactions that took advantage of differences between international tax systems. Barclays marketed some versions of STARS to a number of corporations, including AIG, Microsoft, Intel, and Prudential. KPMG introduced the STARS transaction to BB&T at a January 17, 2002 meeting and used a slide show to outline the steps necessary for the scheme to work. KPMG had little prior business relationship with BB&T.

Contrived transactions

The key idea of the tax avoidance scheme was to generate large-scale foreign tax credits which could in turn be used to enhance revenue and reduce taxes payable by BB&T in the US. A series of transactions with circular cash flows were designed to create the tax savings.

The court noted that in essence the scheme called for BB&T to establish a trust containing approximately US$6 billion in revenue-producing bank assets. The monthly revenue from the trust was then cycled through a UK trustee, an act that served as a basis for UK taxation. Although the revenue was immediately returned to BB&T’s trust, the assessment of UK taxes generated tax credits that were shared 50/50 between Barclays and BB&T.

A US$1.5 billion loan from Barclays to BB&T was also part of the structured transaction, although the loan was not necessary to the objective of generating foreign tax credits. The Barclays monthly payment to BB&T represented BB&T’s share of the tax credits, and had the effect of reducing the interest cost of BB&T’s loan.

The main question for the 21-day court hearing was whether the STARS transaction had any purpose other than to generate tax savings, and if not, whether penalties should be assessed against BB&T. The 67-page court judgment found in favour of the government and the company has been ordered to pay US$680 million plus penalties of US$112 million.

After examining some 1,250 exhibits the judge referred to the scheme as “an abusive tax avoidance scheme” and said that the “conduct of those persons from BB&T, Barclays, KPMG, and the Sidley Austin law firm who were involved in this and other transactions was nothing short of reprehensible”.

The judge went on: “The professionals involved should have known better than to follow the STARS path, rife with its conflicts of interest, questionable pro forma legal and accounting opinions, and a taxpayer with a seemingly insatiable appetite for tax avoidance”. The whole STARS set-up was described as “a sham structure”.

Controversial pasts

Barclays and KPMG are no strangers to tax avoidance controversies. After lengthy investigations by the US Senate Permanent Subcommittee on Investigations and action by the US Department of Justice, KPMG were fined US$456 million for “criminal wrongdoing” in tax matters and a number of its former personnel were also given prison sentences. The firm has also been the subject of investigation of the UK House of Commons Public Accounts Committee, but this has not dulled its appetite for profits through the sale of tax avoidance schemes.

Barclays relies upon taxpayer guarantees for its core business, but operates a very lucrative tax avoidance business which is estimated to have generated around a billion pounds in fees each year between 2007 and 2010. Last year the UK government had to introduce emergency legislation to negate two avoidance schemes used by Barclays for its own business which could have deprived the UK Treasury of around £500 million. Despite fines and prison sentences major businesses remain addicted to tax avoidance. Public opprobrium has become just another cost of doing business.

It is time to shut down businesses who routinely pick citizens’ pockets through tax avoidance. Their schemes are undermining revenues that are much needed to revive the economy and provide education, healthcare, pensions, security and other public goods that distinguish civilised societies from the rest.

Yet the UK government continues to shower gifts on tax avoiders, KPMG continues to receive public contracts and Barclays is propped up by taxpayer-funded guarantees and loans. Only this week Ed Miliband hired KPMG’s deputy chairman for advice on low pay. Rather than giving them another consultancy job, politicians should be asking KPMG to explain the firm’s role in the erosion of social fabric.


This article first appeared on The Conversation website

John McDonnell MP's verdict on Ed Miliband's conference speech

Since Ed Miliband became leader, the strategy of the left has been to make issues safe for him by building support within and outside the party issue by issue. Only when it's safe is he confident about moving on an issue. Today's speech demonstrated that we are setting the agenda but there's so much further to go. A major housebuilding programme is needed, but it needs to be public housing alongside rent controls to stop landlords profiteering from housing benefits.

Challenging the scapegoating of unemployed and disabled people needs to be made a reality by scrapping the rigged capability tests associated with Atos and abolishing workfare. Time limited price controls won't end the rip-offs. A clear commitment to end privatisation is needed, especially in the NHS, and to bring rail, water and energy back into public ownership plus, if it goes ahead, Royal Mail. 

To tackle low pay, we need to make the minimum wage a living wage by right, re-establish trade union rights and restore a commitment to full employment. People already suspect this is a recovery for the rich and ongoing recession for the rest. This is exactly the time when people want more radical action. Make today's speech a beginning.

Osborne ‘slays Lloyds goose for quick buck’

Chancellor sells £3.2bn stake in profitable bank 

MINISTERS began reprivatising Lloyds yesterday, flogging off a £3.2 billion stake in the once failing bank.

Chancellor George Osborne hailed the sell-off as evidence that Britain was “turning the corner,” but economists raised concerns that the banking sector was merely returning to the light-touch approach central to the severity of the financial crisis in the first place.

Investors snapped up the stock at 75p a share – just above the 73.6p average the Treasury paid in the £20.5bn bailout the bank at the height of the financial crisis.

The taxpayer’s stake has been reduced from 38.7 per cent to 32.7 per cent, with no further sales for at least 90 days.

Mr Osborne said the sale eased the national debt by £586 million, based on a paper valuation of the shares on government books, though that figure is subject to Office for National Statistics approval.

The Tory Chancellor said: “This is another step in the long journey in putting right what went so badly wrong in the British economy.”

But left economists warned that the fire sale would be bad for Britain in the long term. Left Economics Advisory Panel co-ordinator Andrew Fisher said: “Lloyds was bailed out by the state, and propped up with public money.

“Now Lloyds has returned to profit, rather than maintaining a long-term income stream, it is being sold off for private profit.

“This is slaughtering a goose that lays golden eggs for a one-off fry-up, even leaving aside the government’s criminal failure to use its public stake in the banks to change banking culture or invest in the public interest.”

And the Socialist Economic Bulletin’s Michael Burke warned that the sell-off was “a return to the system we had before.”

“It’s a drive by the government to bail out the most failing aspects of the private sector – that of light-touch regulation in the financial sector, while imposing austerity cuts for the rest of society.

“They’re selling off one of our assets instead of using the profits for regeneration.”

This article first appeared in the Morning Star

 

Big business is policing tax avoidance – what could possibly go wrong?

David Heaton's resignation from an advisory panel on tax abuse exposes the perils of hiving off tax avoidance enforcement

Prem Sikka

The privatisation of Royal Mail is making headlines, but another form of privatisation is attracting less attention – of UK law enforcement in vital areas, such as organised tax avoidance. Now it is business interests that decide whether Her Majesty's Revenue and Customs (HMRC) can go after those involved in abusive tax avoidance schemes, and this includes those who are close to the tax avoidance industry.

The flaws in the privatisation of law enforcement have been highlighted by the resignation of David Heaton from the government's flagship general anti-abuse rule (Gaar) panel. The panel is supposed to tackle tax abuses but Heaton was freely giving tips for dodging taxes. Heaton is a partner in accountancy firm Baker Tilly and is also a recent chair of the Tax Faculty at the Institute of Chartered Accountants in England and Wales. Baker Tilly is no stranger to tax controversies as the firm's revenues are dependent on novel interpretations of tax laws. In January 2011, the UK government raised VAT from 17.5% to 20% and the firm urged companies to do their billing in advance and thus avoid the hike. In recent years, Baker Tilly has expanded its revenue-earning capacity by absorbing organisations chastised for designing aggressive tax-avoidance schemes.

The Gaar legislation came into effect on 1 July 2013 and is part of a trend of giving business a key role in law enforcement. Originally, it was intended to enable HMRC to challenge "aggressive" tax avoidance, but was soon diluted to focus only on the most abusive forms of tax avoidance. The flaws were noted by Lord MacGregor, chair of the House of Lords economic affairs sub-committee on the finance bill, who said that: "There is a misconception that Gaar will mean the likes of Starbucks and Amazon will be slapped with massive tax bills. This is wrong and the government needs to explain that to the public. Gaar is narrowly defined and will only impact on the most abusive of tax avoidance".

The Gaar legislation contains a "double reasonableness" test and requires HMRC to show that the tax avoidance schemes under scrutiny "cannot [reasonably] be regarded as a reasonable course of action". An avoidance scheme will be treated as abusive only if it would not be reasonable to hold such a view. So, if a dubious practice is widespread and established then it may well be considered to be reasonable.

HMRC is further shackled in that it can't easily go to the courts to enforce Gaar because it needs permission from a panel of experts on whether the arrangements in question constitute a reasonable course of action. The panel members are unpaid and this inevitably favours businesses that can bear the cost of seconding staff. In addition to Heaton, other members of the panel are Patrick Mears (chair), a senior tax partner at law firm Allen and Overy; Michael Hardwick, a consultant at law firm Linklaters; Brian Jackson, vice-president for group tax at Burberry group plc and previously tax partner at KPMG; Sue Laing, a partner at law firm Boodle Hatfield; Gary Shiels, a business consultant; and Bob Wheatcroft, a partner in accountancy firm Armstrong Watson.

There is no representation from NGOs and others who routinely expose tax avoidance. If matters reach a court, then judges need to take into account the opinion of the Gaar advisory panel given to the HMRC. The legislation says little about the public accountability of the panel.

George Osborne courted public opinion by saying that he found tax avoidance/evasion "morally repugnant", but the government's sense of morality is to appoint foxes to guard the henhouse. No doubt, members of the Gaar panel are devoted to serving the public interest, but their conception of the public interest is likely to be informed by their business and professional interests, especially as their profits and bonuses are dependent on serving clients. So who is safeguarding the interests of the ordinary people?

Neoliberals would defend the current arrangements by arguing that government needs people who know the practices and are thus best suited to be the guards. If that logic had any substance then those falling on hard times or suffering because of the bedroom tax should be deciding who can reasonably be prosecuted for, say, benefit fraud. But that is not the case. The government has mobilised the full might of the state to tackle benefit fraud estimated to be around £1.9bn a year, but the same does not apply to tax avoidance/evasion running at between £35bn and £100bn a year.

This article first appeared on Comment is Free

MG Rover debacle can’t hide accounting regulation failures

Prem Sikka

The UK accountancy watchdog has barked. The Financial Reporting Council (FRC) has fined Deloitte & Touche £14 million for failures relating to the demise of MG Rover. The report says Deloitte was engaged in huge conflicts of interest as the firm acted both as auditor and advisor to the company and its directors.

The MG Rover debacle began in 2000 when four businessmen (subsequently known as the Phoenix Four) bought the ailing carmaker from BMW for just £10. The purchase was accompanied by a loan of £423 million from BMW and the UK government also provided additional funds. Deloitte acted as auditor of MG Rover and an adviser to the Phoenix Four. The company continued to receive a clean bill of health from auditors. Between 2000 and 2005, the Phoenix Four collected around £42 million in remuneration. With advice from Deloitte some £7.7 million ended up in an offshore trust in Guernsey. In 2005, the company collapsed with debts of nearly £1.4 billion. Some 6,000 workers lost their jobs.

Following a public outcry, the Department of Business Innovation and Skills appointed inspectors, one of whom was an accountant, to investigate the debacle. The two volume report (here and here ) cost £16 million and was published in 2009. The report noted that between 2000 and 2005, Deloitte received £30.7m in fees, of which £28.8m related to consultancy, that is, only £1.9 related to audits.

Deloitte was advising the company and its directors and then audited the resulting transactions. Hence the concerns about possible conflicts of interest and the disciplinary tribunal’s conclusion that Deloitte “failed to be sufficiently objective in its work for MG Rover”. Deloitte is found guilty of “misconduct” and the FRC report states: “the acts which amount to misconduct were quite deliberate” and the firm and its lead partner “placed their own interest ahead of that of the public and compromised their own objectivity. This was a flagrant disregard of the professional standards.”

The FRC’s reputation as an accounting watchdog was severely battered by the banking crash. All distressed banks received a clean bill of health from their auditors even though depositors were queuing outside banks to withdraw their cash and governments were bailing out banks. The FRC failed to investigate any of the auditing firms. The MG Rover debacle has given it an opportunity to reinvent itself. The £14 million fine on Deloitte is the highest ever against any accounting firms. But all is not what it seems.

For any regulatory system to be effective regulators need to act swiftly. That has not been the case for the FRC. It initially announced its intention to investigate the conduct of Deloitte as auditor and adviser to the MG Rover Group in August 2005. The wheels of the profession grind slowly and then it claimed that will proceed after the inspectors’ reports if finalised, which was published in 2009. It has taken the FRC another four years to do anything. This is hardly a model of swift action.

The £14m fine may be the largest ever, but needs to be seen in perspective. It is less than half of the £30.7m fees collected by Deloitte. So despite failures and “misconduct”, the firm has still made considerable profit. The firm’s UK revenues are around £2.5 billion; that’s £6.85m a day. The fine amounts of the loss of about two days' revenue. This is unlikely to make accountancy firm partners quake in their boots.

The fine will fill the coffers of the FRC and will not be used to compensate creditors, employees, or taxpayers who provided social security and other benefits for the redundant workers.

The MG Rover episode does not herald a new dawn in the regulation of auditors. Despite the toxic effects of conflicts of interest and calls from parliamentary committees, the FRC has resisted a total ban on auditors acting as consultants for companies. So companies will continue to audit the transactions they themselves have overseen. Some of the darker practices could be flushed out and given public visibility by compulsory tendering of audits, but the FRC opposes that too.

For the time being, the MG Rover episode may legitimise the FRC’s regulatory credentials but the fault lines are as big as ever and will not go away.

• This article first appeared on The Conversation website