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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Jeremy Corbyn challenged by Labour MPs to sack Ken Livingstone from defence review

Former mayor of London criticised at PLP meeting over comments on 7 July bombings. 

After Jeremy Corbyn's decision to give Labour MPs a free vote over air strikes in Syria, tonight's Parliamentary Labour Party (PLP) meeting was less fractious than it could have been. But one grandee was still moved to declare that the "ferocity" of the attacks on the leader made it the most "uplifting" he had attended.

Margaret Beckett, the former foreign secretary, told the meeting: "We cannot unite the party if the leader's office is determined to divide us." Several MPs said afterwards that many of those who shared Corbyn's opposition to air strikes believed he had mishandled the process by appealing to MPs over the heads of the shadow cabinet and then to members. David Winnick declared that those who favoured military action faced a "shakedown" and deselection by Momentum activists. "It is completely unacceptable. They are a party within a party," he said of the Corbyn-aligned group. The "huge applause" for Hilary Benn, who favours intervention, far outweighed that for the leader, I'm told. 

There was also loud agreement when Jack Dromey condemned Ken Livingstone for blaming Tony Blair's invasion of Iraq for the 7 July 2005 bombings. Along with Angela Smith MP, Dromey demanded that Livingstone be sacked as the co-chair of Labour's defence review. Significantly, Benn said aftewards that he agreed with every word Dromey had said. Corbyn's office has previously said that it is up to the NEC, not the leader, whether the former London mayor holds the position. In reference to 7 July, an aide repeated Corbyn's statement that he preferred to "remember the brilliant words Ken used after 7/7". 

As on previous occasions, MPs complained that the leader failed to answer the questions that were put to him. A shadow minister told me that he "dodged" one on whether he believed the UK should end air strikes against Isis in Iraq. In reference to Syria, a Corbyn aide said afterwards that "There was significant support for the leader. There was a wide debate, with people speaking on both sides of the arguments." After David Cameron's decision to call a vote on air strikes for Wednesday, leaving only a day for debate, the number of Labour MPs backing intervention is likely to fall. One shadow minister told me that as few as 40-50 may back the government, though most expect the total to be closer to the original figure of 99. 

At the end of another remarkable day in Labour's history, a Corbyn aide concluded: "It was always going to be a bumpy ride when you have a leader who was elected by a large number outside parliament but whose support in the PLP is quite limited. There are a small number who find it hard to come to terms with that result."

George Eaton is political editor of the New Statesman.