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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France to bulldoze Calais Jungle days after child refugees arrive in the UK

The camp houses thousands. 

Refugees and migrants in Calais began queuing up for buses this morning as the French authorities plan to demolish the "Jungle" camp.

But activists fear that, unless France significantly speeds up its asylum process, the displaced people will simply move to other camps along the northern French coast.

Meanwhile, the first children of Calais brought to the UK under the Dubs Amendment arrived at the weekend.

The camp known as the Jungle, in a wasteland by the port of Calais, is actually the latest manifestation in a series of camps established since 1999, when a French reception centre became too crowded.

However, it has swelled as a result of the refugee crisis, and attempts by residents to sneak onto lorries entering the Channel Tunnel have become daily occurences. The French authorities bulldozed part of it earlier this year.

Ahead of the latest demolishment, which is expected to happen on Tuesday, Clare Moseley, founder of Care4Calais, said: “In February this year over 50 per cent of the camp was demolished and yet six months later the camp is bigger than it has ever been before. 

"This is clear evidence that demolitions do not act as a deterrent.  The refugees come because they have no choice."

Future refugees will go to other camps with even less facilities, she warned.

The camp houses thousands of residents, but because of the authorities' unwillingness to legitimise it, there is no official presence. Instead, the residents must rely on volunteer aid services and have little means to stop intruders entering. 

Although conditions in the camp can be dire, residents have created a high street with basic tent shops and restaurants catering to the needs of its displaced population. Many of those in the camp say they are there because they hope to be reunited with family in Britain, or they have given up on ever being processed by the French authorities. 

After the UK government was pressurised into passing the Dubs Amendment, which provides sanctuary to unaccompanied child refugees, some children from the camp have arrived in the UK. The first group is reportedly mostly girls from Eritrea, who will be processed at a UK immigration centre.

One of the MPs crucial to ensuring the Dubs Amendment delivered, Stella Creasy, said many more still needed help. 

Children reunited with their families under the Dublin Convention arrived in the UK last week, although their arrival was overshadowed by a debate over age checks.  

Julia Rampen is the editor of The Staggers, The New Statesman's online rolling politics blog. She was previously deputy editor at Mirror Money Online and has worked as a financial journalist for several trade magazines.