UBS, Deutsche Bank Escaped Bonus Taxes Like Houdini, Judges Say

  • Deutsche Bank, UBS dispute with tax authority dates to 2004
  • Banks must pay taxes on 2004 employee bonuses, U.K. court says

Deutsche Bank AG and UBS Group AG must pay taxes on two banker bonuses plans, the U.K. Supreme Court ruled, saying the firms exploited loopholes to avoid payments in a decision that will affect a number of similar arrangements.

The 12-year-old dispute involved taxes on two 90 million-pound ($128 million) employee bonus plans set up in 2003 to reduce liabilities on some bonuses the following year. The British tax collection agency, Her Majesty’s Revenue & Customs, later found the plans amounted to tax avoidance and asked UBS and Deutsche Bank to pay about 50 million pounds each.

Supreme Court Judge Jonathan Mance said the schemes were “commercially irrelevant” and had no purpose other than to escape taxes, which is not what lawmakers intended when they created the rules.

“It is difficult to accept that Parliament intended to encourage, by exemption from taxation, the award of shares to employees, when the award of such shares has no purpose other than the obtaining of the exemption itself,” Mance said.

Tax Avoidance

The British government has become aggressive in targeting legal but unpopular tax avoidance, closing loopholes and pursuing individuals and corporations in courts. Mance said the appeal was a test case for several other schemes.

“It’s very bad news for the banks involved: they will need to pay the tax on employee bonuses which were delivered over a decade ago,” said Justin McGilloway, a lawyer at Wedlake Bell who wasn’t involved in the case. “This success could open the door for HMRC to challenge other so called ‘tax avoidance schemes,”’ which were perfectly legal when they were originally implemented.”

In the Supreme Court case, lawyers for Deutsche Bank and UBS argued that while the banks had tried to avoid taxes, they had done so without breaking any rules. Both banks say the disputed arrangements were only used once. The banks, not the employees awarded the bonuses, will have to pay the money owed to HMRC.

“Houdini Taxpayer”

“This matter concerns a disagreement over the interpretation of highly technical tax legislation and dates back to a one-off compensation plan for 2003,” said UBS spokesman Oliver Gadney, who added that the bank was disappointed with the decision. Deutsche Bank spokesmen Charlie Olivier said that all tax and national insurance due as a result of the ruling had already been paid.

Another Supreme Court Judge, Robert Reed, compared the banks’ plans to a “Houdini taxpayer” making sophisticated attempts to “avoid the manacles of tax,” in the written decision. “In our society, a great deal of intellectual effort is devoted to tax avoidance,” he noted.

Much of the attention on tax avoidance has focused on companies.

Google moved more than 10.7 billion euros ($11.7 billion) in international revenues to a Bermuda mailbox in 2014 through a series of tax structures known as a "Double Irish" and a "Dutch sandwich," the most recent year for which figures are available. Doing so saved Alphabet Inc., Google’s parent company, some $2.4 billion in worldwide taxes that year, regulatory filings show.

In a report last month, the U.K. Parliament’s Public Accounts Committee questioned whether Google was paying its fair share of tax in the country. The company’s 130 million-pound settlement with the British tax authority “seems disproportionately small” compared with the size of the company’s activities in the U.K., the report said.

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