The figures, published in Merrill’s regulatory filings, emphasise how the meltdown in the US subprime mortgage market is undermining tax receipts for governments far beyond America’s borders. They also offer a rare glimpse into the tax management policies of a global financial institution.
The losses arose because almost all of Merrill’s global activity in the market for collateralised debt obligations – complex debt securities, often backed by subprime mortgages – has been channelled through Merrill Lynch International, its UK-based subsidiary.
Merrill has suffered heavy losses on its holdings of CDOs as a result of the credit market turmoil. It offloaded securities with a nominal value of $30bn last month to Lone Star, the US investment group, triggering more writedowns.
After the latest sale, Merrill has a UK operating loss of about $29bn that it can carry forward indefinitely for tax purposes. At the current corporation tax rate of 28 per cent, that means the bank will be able to offset losses against future profits, lowering its UK tax bill by as much as $8bn. Merrill declined to comment.
Other banks have suffered heavy losses as a result of the crisis, but these appear to be mainly at the expense of US taxpayers. UBS, the Swiss bank, this week said most of the $42bn the bank had lost as a result of the subprime meltdown was booked in the US.
The majority of Citigroup’s writedowns were also in the US, according to regulatory filings, although its investment banking division in Europe, which is run from London, has suffered losses.
Robert Willens, a tax expert, said Merrill’s structure was unusual. “Merrill have to be able to say that the UK subsidiary was the owner of those securities. It does not matter where the derivatives unit is based or where the trades were executed. The only thing that matters is who was the owner of the securities,” he said.
In New York, the heavy writedowns have intensified concerns that some Wall Street investment banks, traditionally large contributors to tax receipts in the city and the state, may not pay taxes for several years as they offset accumulated losses against future profits.
The UK’s corporate tax rate has historically been lower than in other developed countries such as France, Germany and the US, where companies pay taxes to their local city and state, as well as to the federal government.
This different tax system has helped to make the City of London a magnet for the global financial services industry.
Based on past levels of activity, it could take Merrill’s UK operations decades to make full use of the tax benefit. In 2006, Merrill Lynch International paid $130m in corporation tax, according to accounts filed at Companies House.
If Merrill’s UK subsidiary were to continue to generate profits at 2006 levels, a record year for the investment banking business, it would pay no UK corporation tax for 60 years.