Aug. 15 (Bloomberg) -- Merrill Lynch & Co. booked $29 billion of losses from U.S. subprime mortgages and collateralized debt obligations through its U.K. unit, reducing the likelihood the firm will pay British taxes for years to come.

The division, Merrill Lynch International Ltd., recorded most of the losses this year, including $5 billion from the sale of $30.6 billion in collateralized debt obligations, the New York-based firm said in an Aug. 5 filing with the U.S. Securities and Exchange Commission.

Merrill's U.K. tax losses may cut its future tax bills by as much as $8 billion, based on a corporate tax rate of 28 percent, said the Financial Times newspaper, which first reported the firm's tax disclosure on its Web site. Merrill's British subsidiary may not have to pay taxes for as long as 60 years, the paper said. In previous years, the unit had paid tax at the U.K.'s previous rate of 30 percent, compared with the top U.S. rate of 35 percent.

``It obviously makes commercial sense, though it would be subject to certain legal and tax law restrictions,'' said John Gu, a Hong Kong-based tax partner at KPMG International. ``No company wants the mismatch by losing money on one unit while paying tax on another profitable operation.''

Merrill Lynch's losses in the U.K. will take into account the sale on July 28 of $30.6 billion of U.S. super-senior collateralized debt obligations to a unit of Lone Star Funds for $6.7 billion, the filing said. That will lead to a pretax writedown of $4.4 billion in the third quarter.

``The loss has an unlimited carry forward period and a tax benefit,'' the filing said.

Worldwide Writedowns

Financial companies worldwide have reported writedowns and credit losses of more than $500 billion since the start of 2007. Some Wall Street firms may pay little or no New York City or state taxes for years, Mayor Michael Bloomberg said this week.

Some companies are seeking refunds from the city on taxes they paid ahead of time, saying losses have cut their tax liability to zero. The banks pay tax on 110 percent of earnings in advance as a ``safe harbor,'' protecting against penalties for underpayment.

``It will be a number of years before Wall Street starts paying taxes again,'' the mayor said at a press conference Aug. 11 in Manhattan. ``They will carry forward all of those losses.'' The mayor is founder and majority owner of Bloomberg LP, the parent company of Bloomberg News.

No Transfer

``Business taxes are not a matter for the Mayor,'' a spokesman for London's Mayor Boris Johnson said in an e-mailed statement. ``We recognize that these are very tough economic times for the banks and that it is vital for the continued success of the City of London that they get through these challenges.''

``We cannot comment on individual tax matters,'' a spokesman for HM Revenue & Customs, the U.K. government department responsible for tax, said in an e-mailed statement. ``However under U.K. tax law and international tax standards it is not possible to transfer profits or losses made elsewhere into the U.K. for tax purposes.''

Tim Cobb, a London-based spokesman for Merrill, declined to comment.

Merrill's losses led to the replacement of Chief Executive Officer Stan O'Neal with John Thain. Last month, Thain raised $9.8 billion in a share sale and sold the CDOs for 22 cents on the dollar to Lone Star Funds, a Dallas-based investment manager.

``The loss has an unlimited carryforward period and a tax benefit has been recognized for the deferred tax asset,'' Merrill said in the regulatory filing.

Job Cuts

Merrill has taken $51.8 billion in losses and cut 5,220 jobs while Citigroup Inc., the largest U.S. bank by assets, lost about $55 billion and slashed more than 14,000 jobs, according to data compiled by Bloomberg News.

Merrill, which lost money for four straight quarters, recorded a $4.2 billion global income tax benefit in 2007 and $4.8 billion in the first six months of 2008, according to company reports.

``It's one of the tax-planning ideas caused by uneven distribution of profit and loss at a multinational,'' said Jane Hui, a Hong Kong-based tax partner at Ernst & Young LLP. ``When a company expects that its losses cannot be recovered in the foreseeable future, it'll think of a way to utilize the tax law in a more efficient way.''

One of the ways to spread the tax burden is to reallocate employee costs to different regions to match revenue and profit, Hui said.

Tax Refunds

Companies such as Merrill are allowed to use those benefits to get refunds on taxes paid in the prior two years and to offset tax payments going forward for as long as two decades, said Robert Willens, president and chief executive officer of Robert Willens LLC, a tax consulting company in New York, on Aug. 13.

UBS said on Aug. 12 that tax credits of 3.8 billion Swiss francs ($3.5 billion) helped offset losses at the investment banking unit, narrowing the second-quarter net loss to 358 million francs. The Zurich-based bank hasn't paid taxes for the past four quarters, during which it amassed 25.7 billion francs of net losses.

While analysts expect firms including Merrill and Lehman Brothers Holdings Inc. to report losses for 2008, some other Wall Street firms will probably remain profitable and keep paying taxes. Goldman Sachs Group Inc. and Morgan Stanley, the two largest U.S. securities firms, are expected by analysts to record profits this year.

Goldman had a net tax expense of $6.01 billion in 2007, including $488 million in current and deferred state and local taxes, according to the company's annual report.

Merrill imposed a freeze earlier this week on new hires through the end of this year. The freeze extends to previously budgeted posts as well as replacement hires, according to an internal memo. The firm eliminated more than 4,200 jobs in the first half, leading to more than $445 million in severance and other restructuring costs. Merrill says the cuts will save about $730 million this year.

To contact the reporter on this story: Zachary R. Mider in New York at zmider1@bloomberg.net; Cathy Chan in Hong Kong at kchan14@bloomberg.net

Last Updated: August 15, 2008 08:50 EDT