Doesn’t Look Like Much Has Really Changed At Deutsche Bank

Barely a week goes by without Deutsche Bank featuring in the news for some reason, usually a bad one. This time, it’s tax avoidance. The FT reports that Deutsche Bank “has been devising complex tax avoidance strategies for some of its largest corporate clients”.

Not that this is illegal, of course. Tax avoidance (as opposed to tax evasion) is minimizing taxation by making full use of reliefs and exemptions allowed by the law. Tax law is complex in every country, and particularly so in mature Western economies: over the years, webs of anomalies have built up, which those with a good knowledge of tax law can legally exploit to reduce taxes. But exploiting those anomalies may mean using reliefs and exemptions for purposes for which they were not originally intended. And it may mean creating extraordinarily complex legal structures for transactions and moving money between several jurisdictions.

For some time now, governments concerned about deteriorating fiscal finances have been clamping down on creative schemes for minimizing taxation. Complex legal structures that have no purpose other than avoiding taxation are now themselves illegal in many countries: banks, accountants and tax lawyers that create them for themselves OR offer them to clients are breaking the law. So the latest fashion is tax-minimizing schemes that appear to have commercial justification. This is what Deutsche Bank has been offering to its corporate clients.

Here’s how the FT describes Deutsche Bank’s machinations:

Under the proposed strategy, a Deutsche client in Brazil would have co-invested with the bank’s Austria unit in a newly established Austrian entity. This Austrian entity would then take the funds and lend them back to the corporate client in a jurisdiction outside Brazil with favourable withholding tax rules — such as another European country.

Both the client and Deutsche Bank would benefit from the “profits” of the Austrian entity — generated from the loan terms — and pay them out as dividends that also qualify for tax exemptions.

Deutsche structured the transactions this way to establish a commercial rationale, such as raising finance, rather than simply rerouting money to avoid tax, people familiar with the strategy explained.

Brazil, eh? That “broken BRIC” whose economy is on the skids and whose fiscal deficit is heading for the moon? It’s hardly the most politically stable country on earth, and its new government is desperately short of money. The last thing it needs is a large German bank helping Brazilian corporations avoid tax. These schemes may potentially be good business, but they are not good behavior.

Nor were Deutsche’s schemes limited to Brazil and Austria. Mexico features too, along with Luxembourg. On what planet is it morally justifiable for a European bank to offer to help corporations in a country as poor as Mexico to avoid tax – let alone move the funds to a country that has become rich principally by draining tax revenues from its neighbors?