"Toxic investments give Merrill £16bn tax break"

Says the headline in The Guardian. OK, that's mathematically incorrect - what they are talking about is £16 bn of allowable losses that ML have booked - rightly or wrongly - through its UK subsidiaries, so the value of the tax break is 28% of that, or £4.5 bn. However, the bones of the story appear to be correctly reported, as the FT says much the same.

As somebody who works in international tax, I can only begin to guess why ML booked its losses through the UK rather than claiming them in the US, but here's what I posted at everybody's favourite retired accountant:

OK. Being realistic and simplistic about this, ML have booked a load of losses in their UK subsidiary that didn’t really relate to UK business (I think that much is uncontentious).

But this is a US bank, so what they are really trying to do is avoid US taxes. So to make use of these losses for tax purposes, in future they will also have to book a load of PROFITS in the UK that don’t really belong in the UK. I can only assume that UK rules on carry forward of losses are more generous than US rules (or else they’d have left the losses to carry forward in the US).

So on a country basis, while the losses didn’t belong in the UK, neither will the profits. If anything, it’s the IRS who are being conned here, not HMRC. So for corporation tax, from HMRC point of view it’s nothing lost. BUT, to be able to use up those losses, ML need a presence here, so they will have more UK employees paying more UK PAYE, overall it is quite possible that HMRC comes out ahead on the deal.

With my professional hat on, it seems like a very high-risk strategy to me (and they ought to sack their advisors for letting this be splashed all over the papers). The strategy only works if the IRS allow ML to cheerfully transfer future US-source profits to the UK. Don't forget that the IRS make HMRC look positively gentlemanly - under transfer pricing rules, the IRS are almost certain to turn a blind eye to the fact that losses were transferred out of their jurisdiction, but will sing a different tune once ML start making profits again and try to shuffle those offshore.

So worst case, ML will pay tax on future profits in the US (because the IRS won't let them shift profits offshore) and in the UK (because HMRC might disallow the carried forward losses on the basis that they relate to a different trade or because of some cunning re-classification between trade losses and deficits on trading/non-trading loan relationships etc.)

Ah well.