Big Wall Street investment banks have designed and marketed schemes enabling non-US taxpayers, including offshore hedge funds, to evade millions of dollars in taxes each year on US stock dividends, Senate investigators have found.
Some banks have been crafting for more than 10 years transactions designed to enable their foreign clients to dodge US taxes on dividends, while the Internal Revenue Service — the US tax agency — failed to act to prevent the abuse, two senators say.
A yearlong investigation by a Senate Homeland Security and Governmental Affairs subcommittee, whose results were to be made public yesterday, found that the evasion of dividend taxes added up to billions of dollars in revenue lost to the US Treasury over the past decade.
IRS Commissioner Douglas Shulman was scheduled to testify on the issue at a hearing yesterday by the investigative subcommittee.
Executives of Lehman Brothers Holdings Inc, Morgan Stanley and Deutsche Bank, and from several hedge funds were also expected to appear as witnesses.
The inquiry is part of a series of hearings by the Senate panel on offshore tax abuse, which is estimated to cost the country US$100 billion a year in lost tax revenue.
In July, the subcommittee accused banks in Switzerland and Liechtenstein of helping wealthy Americans commit large-scale tax evasion and called for tougher laws to combat offshore tax havens around the world.
“Major financial institutions have devised complex financial structures to enable their offshore clients to dodge US dividend taxes,” Democratic Senator Carl Levin, the subcommittee’s chairman, said in a statement on Wednesday: “We need legislation to take these abusive tax-avoidance gimmicks off the market.”
The panel’s senior Republican, Senator Norm Coleman, said it was “especially troubling that the IRS has failed to address many of these problems for so long.”
Offshore hedge funds have frequently participated in the tax-evasion transactions, and their US investment mangers often facilitate their participation, the Senate panel found.
The banks designed and marketed transactions, mainly involving stock swaps or loans, that were described as offering dividend or yield “enhancement” or “dividend uplift,” the investigators said.
They developed case histories involving six major investment banks: Citigroup Inc, Deutsche Bank, Lehman Brothers, Merrill Lynch & Co Inc, Morgan Stanley and UBS.
Foreigners who invest in the US are exempt from many US taxes. If they invest in a US company that pays a dividend to shareholders, however, US law requires them to pay taxes on the dividends they receive.
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