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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Why isn't Labour putting forward Corbynite candidates?

Despite his successes as a candidate, the organisational victories have gone the way of Corbyn's opponents. 

The contest changes, but the result remains the same: Jeremy Corbyn’s preferred candidate defeated in a parliamentary selection. Afzhal Khan is Labour’s candidate in the Manchester Gorton by-election and the overwhelming favourite to be the seat’s next MP.

Although Khan, an MEP, was one of  the minority of Labour’s European MPs to dissent from a letter from the European parliamentary Labour party calling for Jeremy Corbyn to go in the summer of 2016, he backed Andy Burnham and Tom Watson in 2015, and it is widely believed, fairly or unfairly, that Khan had, as one local activist put it, “the brains to know which way the wind was blowing” rather than being a pukka Corbynite.

For the leader’s office, it was a double defeat;  their preferred candidate, Sam Wheeler, was kept off the longlist, when the party’s Corbynsceptics allied with the party’s BAME leadership to draw up an all ethnic minority shortlist, and Yasmine Dar, their back-up option, was narrowly defeated by Khan among members in Manchester Gorton.

But even when the leadership has got its preferred candidate to the contest, they have been defeated. That even happened in Copeland, where the shortlist was drawn up by Corbynites and designed to advantage Rachel Holliday, the leader’s office preferred candidate.

Why does the Labour left keep losing? Supporters combination of bad luck and bad decisions for the defeat.

In Oldham West, where Michael Meacher, a committed supporter of Jeremy Corbyn’s, was succeeded by Jim McMahon, who voted for Liz Kendall, McMahon was seen to be so far ahead that they had no credible chance of stopping him. Rosena Allin-Khan was a near-perfect candidate to hold the seat of Tooting: a doctor at the local hospital, the seat’s largest employer, with links to both the Polish and Pakistani communities that make up the seat’s biggest minority blocs.  Gillian Troughton, who won the Copeland selection, is a respected local councillor.

But the leadership has also made bad decisions, some claim.  The failure to get a candidate in Manchester Gorton was particularly egregious, as one trade unionist puts it: “We all knew that Gerald was not going to make it [until 2020], they had a local boy with good connections to the trade unions, that contest should have been theirs for the taking”. Instead, they lost control of the selection panel because Jeremy Corbyn missed an NEC meeting – the NEC is hung at present as the Corbynsceptics sacrificed their majority of one to retain the chair – and with it their best chance of taking the seat.

Others close to the leadership point out that for the first year of Corbyn’s leadership, the leader’s office was more preoccupied with the struggle for survival than it was with getting more of its people in. Decisions in by-elections were taken on the hop and often in a way that led to problems later down the line. It made sense to keep Mo Azam, from the party’s left, off the shortlist in Oldham West when Labour MPs were worried for their own seats and about the Ukip effect if Labour selected a minority candidate. But that enraged the party’s minority politicians and led directly to the all-ethnic-minority shortlist in Manchester Gorton.

They also point out that the party's councillor base, from where many candidates are drawn, is still largely Corbynsceptic, though they hope that this will change in the next round of local government selections. (Councillors must go through a reselection process at every election.)

But the biggest shift has very little to do with the Labour leadership. The big victories for the Labour left in internal battles under Ed Miliband were the result of Unite and the GMB working together. Now they are, for various reasons, at odds and the GMB has proven significantly better at working shortlists and campaigning for its members to become MPs.  That helps Corbynsceptics. “The reason why so many of the unions supported Jeremy the first time,” one senior Corbynite argues, “Is they wanted to move the Labour party a little bit to the left. They didn’t want a socialist transformation of the Labour party. And actually if you look at the people getting selected they are not Corbynites, but they are not Blairites either, and that’s what the unions wanted.”

Regardless of why, it means that, two years into Corbyn’s leadership, the Labour left finds itself smaller in parliament than it was at the beginning.  

Stephen Bush is special correspondent at the New Statesman. His daily briefing, Morning Call, provides a quick and essential guide to British politics.