The feds are fighting five domestic banks over transactions Barclays arranged that allegedly exploited discrepancies in U.K. and U.S. tax laws to stiff Uncle Sam for billions, a joint investigation by the Financial Times and ProPublica found.
The deals, known as “structured trust advantaged repackaged securities,” or STARS (one of those names that makes us suspect the investment bankers started with the acronym and then decided what words it would stand for), were so complex that a Harvard-educated federal judge adjudicating one of the court cases couldn’t make heads or tails of them. So we’re not even going to try to give you a pat summary, but the FT has a nifty interactive feature that explains the structures in relatively simple terms.
“Foreign tax credits are designed in US law to prevent double taxation of companies that do business overseas,” the FT says. “Because US companies are taxed on their worldwide income, they are allowed to claim credit for taxes paid in foreign jurisdictions so as to keep their tax bill essentially neutral.” But the IRS alleges the STARS deals “were ‘foreign tax credit generator’ schemes to reap credits even when there was no double taxation.”
Aside from the five U.S. banks that used STARS – BB&T, Bank of New York Mellon, Sovereign and Wells Fargo – the government is also tussling with AIG over a different kind of a foreign tax credit deal that dates back to the 1990s, the FT reports. One of the masterminds behind these transactions was a young Joseph Cassano, who would go on to lead the infamous Financial Products group whose gambles led to AIG getting bailed out by the government in 2008.
Finally, on a related topic, Washington Post columnist Allan Sloan proposes that the FASB require U.S. companies to disclose how much federal income tax they pay “so that we could have an informed discussion” – he notes that some well-intentioned press stories have blundered by confusing accounting and tax figures.