Merrill Lynch gets 60 year UK tax break?

More bad news for the Treasury: looks like the sub-prime fall-out is going to hammer its tax receipts...

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Last Updated: 31 Aug 2010

And it’s not just losses here in the UK that the Exchequer has to worry about. According to today’s FT, Merrill Lynch has channelled about two-thirds of the vast losses it made on dodgy US mortgage securities through its UK subsidiary Merrill Lynch International. This left the latter $29bn in the red for the year – and since this can be carried forward indefinitely against future profits, it could mean that the bank won’t have to pay corporation tax in this country for more than half a century…

It all comes down to a clever bit of accounting. Like every company, the bank’s UK arm has to pay corporation tax on all the profits it makes here, currently at a rate of 28% (which is pretty competitive compared to our European rivals) – but if it makes a loss, it obviously pays nothing. What’s more, if it makes a loss in one year, it can keep carrying this over indefinitely until it’s accumulated enough profit to offset the full amount – and with this kind of hit, that’s going to take a long time.

And the Treasury will definitely notice the shortfall. The FT reckons that in 2006 – which was admittedly a record year for the investment banking industry – Merrill’s UK arm coughed up a meaty $130m in corporation tax for the Government’s coffers. But now it’s got a $29bn loss parked in the accounts for the foreseeable future, it’s not going to be doing this again any time soon. In fact, the paper calculates that even if it immediately gets back to churning out profits at 2006 levels, it won’t have to pay corporation tax for another 60 years. Nice.

To some extent, the City has become a victim of its own success. Merrill can only get away with this because it’s been operating all of its global CDO activity (the debt products that suffered most in the credit crunch) from its London office. So when the market imploded, leaving the bank sitting on massive billion-dollar losses (which eventually put paid to CEO Stan O’Neal), it could legitimately assign them all to London. Other big banks ran their US mortgage products out of the US (not unreasonably), so it’ll be the US exchequer that loses out.

But with Gordon Brown and Alistair Darling desperately trying to scratch around for a few pennies so they can afford a downturn-busting economic rescue package (also known as a hopeful pre-election bribe), news that their tax take is about to plummet is the last thing they’ll want to hear...


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