Barclays tax-planning under investigation

The bank's tax planning has been described as a "sham" in a New York court briefing

In a court case starting today, the US Internal Revenue Service is facing off with the Bank of New York Mellon (BNY) over whether or not controversial tax planning measures that were designed by Barclays are legal.

The IRS claims that cross-border deals that Barclays prepared for the bank, as well as several other mid-sized ones like it, were in fact tax evasion, designed to exploit loopholes that exist in the difference between British and American laws.

The deal designed by Barclays is known as "structured trust advantaged repackaged securities" – STARS, for short – and it really is Byzantine:

Barclays required Petitioner [BNY] to transfer assets that produced income to a trust that would have a U.K. trustee so that the U.K. trustee, as a U.K. resident, would owe and pay U.K. income tax on that income. Of course, from Petitioner's perspective, Petitioner wanted a favorable borrowing rate but did not want to pay taxes twice on the same income. As between the U.S. and the U.K., Petitioner was neutral as to whom it paid its income tax; it just wanted to avoid being double-taxed.

That's BNY's description of the STARS deal. The IRS's is marginally simpler, and significantly more damning:

A U.S. taxpayer who pays $1 of foreign tax and claims $1 of foreign tax credit pays the same amount of tax as if it had paid the $1 to the United States. A U.S. taxpayer who pays $1 of foreign tax, is reimbursed for 50 cents of it by a counterparty, but still claims $1 of U.S. foreign tax credit comes out ahead by 50 cents.

If the counterparty simultaneously recovers the $1 of foreign tax through the foreign tax system, uses 50 cents of that to reimburse the u.s. taxpayer, and keeps the other 50 cents, then both parties are now ahead, each by 50 cents. But the US government has given $1 of foreign tax credit when no foreign tax was in fact paid.

Blown up to size, this is STARS.

Simplified, the case is over whether STARS existed to get BNY a good interest rate by borrowing in the UK, or whether it was a "sham" designed purely to pump the US government for tax credits. Between 1999 and 2006, the IRS claims that the six banks which were involved in STARS took $3.4bn in foreign tax credits. Five of those banks are now included in lawsuits with the IRS, although Barclays itself hasn't been implicated in any wrongdoing.

Despite this, it looks like life will be difficult for the bank, which is one of the leaders in the high-stakes tax planning world. The IRS crackdown follows HMRC retroactively forbidding Barclays from using a tax loophole in a "highly abusive" manner to buy back its own debt tax free. With governments worldwide facing pressure to pay down debt, and the "tax gap" being blamed for much of the difficulty, the bank is going to be facing an unprecedented level of scruitiny in its actions.

People queue to close their accounts. Credit: Getty

Alex Hern is a technology reporter for the Guardian. He was formerly staff writer at the New Statesman. You should follow Alex on Twitter.

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I'm playing sports again – but things just aren't cricket

I start the new season with red wine stains on my cap, a dodgy shoulder and a burnt nostril.

I’ve put my name up for the first match of the season, playing for that team of redoubtable cricketers, the Rain Men, named after their founder Marcus Berkmann’s book about a team of middle-aged and, er, “mixed-ability” players. The book was first published twenty years ago. Feel free to do some rudimentary maths.

I myself haven’t played for three years. I know this because when I go to get some new contact lenses – I don’t like the idea of running around in glasses, or having a cricket ball lodge them into my eyeballs – I am told I have not bought any since 2013. Yes, that would figure. I couldn’t play for much of 2013, and all of 2014, because two weekends a month I was busy with my children, and the other two I was busy with my lover. A game takes up a whole Sunday – one is committed, including travel and the post-match drink, for about ten hours, and that is too long to spend apart from your loved one, unless of course you are married or otherwise permanently settled and you see them all the time anyway.

In 2015 that restriction was lifted for me, but for some reason I spent that year being too sad to think about playing cricket and also far too unfit. I would occasionally walk long distances and do a few dozen desultory lifts of the dumb-bells in order to achieve even the beginnings of some kind of muscular definition, but in the end the lassitude took over and I thought that maybe the team, however ageing, could do without someone who gets a bit winded when walking down stairs.

Then a brief moment of optimism a couple of weeks ago, combined with a ray of what may possibly have been sunshine, inspired me to rejoin the fold. The team’s meticulously kept records, known among the members as “Sad Stats”, inform me that I have played only eight games for them; when one has played ten, one is eligible for a Rain Men cap, a properly made thing whose design and hooped colours are, in their air of having come from another age, seemingly designed specifically to enrage fast bowlers.

The cap I have says “Antigua, WI”. It’s a battered thing I bought on the island a few years ago, now stained, not sure how, with red wine, but which I will say is my own, fearlessly shed blood, should anyone ever ask. The idea is that, if I wear this cap, some idiot will think I have actually played for Antigua and am thus a force to be reckoned with. However, after a few deliveries, I suspect the opposition has decided that the “WI” stands for Women’s Institute rather than West Indies.

So I start my fitness training a week or so before the match. This involves a walk into town for dinner, followed by a single lift of the dumb-bells before I realise that The Thing That Is Wrong With My Right Shoulder is as bad as it was when it started, about a month ago. What is wrong with it? I can’t move my arm above shoulder height, but I can’t think of any strain I could have put on it. Can you get cancer of the shoulder?

Well, this rules out bowling, except bowling is already ruled out on the grounds that I can no longer bowl, even with a fully rotational shoulder joint. Which in our case we have not got, to quote Henry Reed’s “Naming of Parts”.

In the end, I confine my preparations to a few practice shots with the bat on the back terrace while listening to The Archers. Strangely, the bat seems to have put on a lot of weight since I last held it. I tried practising in front of the mirror in the living room, but as I can only see my head in it, this is not much use except for practising my face. On the terrace, I attempt a pull shot with a fag in my mouth, which clenches so as to make me burn my right nostril really rather badly. A week later, when I actually play, it is still sore to the touch.

As for the game . . . well, it’s an odd one. We manage to eke out a draw, and as for my own contribution, the less said about that, the better. But at least I don’t drop any catches and, even though it causes my shoulder agony, I stop a few balls in the field. The ground itself, however, is right in the shadow of the Didcot A power station, in whose ruins are still at least three bodies of the men who were caught there when it collapsed in February. Throughout the game, lorries tip their burdens of mangled metal on enormous scrapheaps. It puts things in perspective. But look in the other direction, and rapidly backwards and forwards the early bees are assaulting and fumbling the flowers. 

Nicholas Lezard is a literary critic for the Guardian and also writes for the Independent. He writes the Down and Out in London column for the New Statesman.

This article first appeared in the 19 May 2016 issue of the New Statesman, The Great Huckster