HMRC investigators home in on massive Square Mile tax avoidance scheme
European prosecutors and tax authorities are intensifying an investigation into a huge tax avoidance trading scheme costing European countries hundreds of millions of euros.
The investigation centres on complex stock trades that major banks allegedly use to earn tax rebates.
The practice was revealed by the Bureau three years ago. At the time, the Bureau estimated the scheme, known as dividend stripping, was costing European treasuries at least €600m.
According to the Wall Street Journal, officials at Her Majesty’s Revenue & Customs (HMRC) have asked the London units of major international banks for information about the transactions.
The HMRC’s involvement is seen as a significant escalation of the probes because of the central role that banks’ London trading desks played in structuring the transactions.
The City’s role in the dividend tax scam comes after a string of financial scandals have shredded the reputation of the Square Mile.
The Bureau’s investigation three years ago found several London-based banks using the practice. There is no suggestion that those banks at the time were involved in anything illegal or are part of any ongoing investigation by authorities.
An HMRC spokesman would not comment on whether it was helping German prosecutors with its investigation.
But he added: “Where called upon, HMRC will … support partner tax administrations in accessing information that is “foreseeably relevant” in accordance with our treaties, which are underpinned by domestic tax law in the UK.”
Dividend stripping works when a bank or hedge fund lends equities in often high yielding French, German or Italian companies to another institution.
The receiving institution then passes the equities through a network of low or no tax jurisdictions before returning the equities to the original owner using a subsidiary in another tax haven. In this way, banks can avoid the 15% average withholding tax levied on dividends in European countries and can even claim back tax rebates.
The practice is known as dividend stripping. The rush to cash in on the practice resulted in unusually large volumes of equity trades just ahead of companies paying their dividends as banks and brokers carried out the trade on behalf of clients.
Last week, Swiss authorities confirmed they raided banks in Switzerland in relation to the investigation.
A loophole in the German law that enabled the dividend stripping strategy was closed in 2012. But lawyers are now wrestling with whether the previous practice was illegal or simply objectionable.
Several banks have already admitted to being involved in the dividend stripping trade. German public sector lender HSH Nordbank said in 2013 it had set aside €127m to cover possible tax liabilities.
HypoVereinsbank, the German arm of Italy’s UniCredit, said in July that an internal probe concluded that the bank had conducted dividend stripping transactions.
