Truthdig
Denmark Is One of the Biggest Victims of Wall Street Tax Avoidance Deals
http://www.truthdig.com/report/item/denmark_is_one_of_wall_streets_tax_avoid
ance_deals_biggest_victims_20160714/
AddThis Sharing Buttons
Share to FacebookShare to TwitterMore AddThis Share optionsShare to Email
Posted on Jul 14, 2016
By Cezary Podkul / ProPublica, and Anne Skjerning and Tor Johannesson /
Børsen
Nyhavn, Denmark. (Nelson L.(www.travelmag.com) CC BY
2.0(https://creativecommons.org/licenses/by/2.0/) )
This piece originally ran on
ProPublica(https://www.propublica.org/article/denmark-is-big-victim-of-wall-
street-tax-avoidance-deals) .
Goldman Sachs, Citigroup, Merrill Lynch and other international banks have
profited for years by arranging short-term loans of stock in Danish
companies, a maneuver that has helped shareholders but deprived Denmark of
substantial tax revenues.
With the banks help, stock owners avoid paying Danish authorities the
dividend
taxes(http://www.bdo.dk/faglig-info/publikationer/skat-og-moms/danish-withho
lding-taxes-outbound-payments/) they would otherwise owe on their holdings
of companies like Maersk, Novo Nordisk, Danske Bank, Tryg and Carlsberg,
among others.
They do so by lending the shares to banks that temporarily transfer them to
other investors with low or no tax obligations around the time when the
dividend is paid. The terms are hedged and arranged months in advance. After
dividend time, the borrowed shares are returned, and the tax savings are
shared among the investors and banks that arranged the trades.
The
maneuver(https://www.propublica.org/article/a-wall-street-deal-that-turns-ta
xes-into-profits) known as dividend arbitrage, or div-arb cost
Denmark about 400 million Danish crowns ($60 million) in lost taxes last
year alone, according to an estimate that we asked
CEPOS(https://www.cepos.dk/english) , a Danish think tank, to provide for
this article
For a country of 5.7 million, the lost revenue is significant: It equals
roughly 1.1 percent of the budget deficit of the Danish government last
year, or about 70 Danish crowns ($10) for each resident.
The tax-avoidance trades are detailed in confidential documents that
ProPublica examined in collaboration with the Danish business daily
Børsen(http://borsen.dk/) . The documents include trade logs, emails, chat
messages and marketing materials that show how such trades happen in Denmark
and various other countries.
For the first time, the documents reveal who is engaged in this kind of tax
avoidance, which has already drawn scrutiny from regulators and lawmakers in
Germany(https://www.propublica.org/article/german-finance-minister-cries-fou
l-over-tax-avoidance-deals) as they try to prevent future losses to
taxpayers.
The documents make clear that the trades which are also known as yield
enhancement are conducted for the purpose of avoiding dividend taxes.
One client memo describes yield enhancement as a short-term loan of shares
owned by a tax-liable shareholder to another investor with a lower rate of
withholding or no tax at all. The tax-exempt investor gets the dividend
tax-free or is able to claim a refund from tax authorities. The difference
between what would have been owed and what was actually paid is then split
between the lender and the borrower, the memo says. In another document,
the trades are described simply as a method to recapture dividend taxes.
The papers disclose the specific Danish shares used in these trades. For
instance, in April 2014, U.S. investment fund manager
Vanguard(https://investor.vanguard.com/home/) lent 1,750 shares of shipping
company Maersk(http://www.maersk.com/en) with a market value of more than
$20 million to unknown investors through Goldman Sachs and Merrill Lynch.
These share loans lasted no longer than 14 days, during which Maersk, one of
Denmarks largest corporations, paid out 280 Danish crowns ($41.6) per share
in dividends. Because the Vanguard funds are based outside of Denmark, they
would normally lose 27
percent(http://www.bdo.dk/faglig-info/publikationer/skat-og-moms/danish-with
holding-taxes-outbound-payments/) of the dividend to taxes, and thus
receive only 73 percent of the total dividend. That comes out to 204.4
Danish crowns ($30.3) per share. Lending the shares allowed the Vanguard
funds to avoid paying the dividend tax, saving 75.6 Danish crowns ($11.3)
per share.
Altogether, that comes to a loss of 132,300 Danish crowns to Denmark
($19,642). Of that amount, the Vanguard funds got to keep about 77,800 in
tax savings they wouldnt otherwise get and the remaining 54,500 crowns went
to large banks and the unknown investors who participated in the deal. Only
Danish taxpayers lost.
When Danish companies pay out dividends each spring, hundreds of these
trades are arranged by various international banks representing lenders and
borrowers of shares. Big baskets of various Danish stocks or individual
stocks with attractive dividends are assembled by bankers and put out for
bidding to various counterparties, documents show.
Vanguard declined to comment for this story, but the company has previously
told ProPublica that securities lending is a widely accepted practice that
we prudently employ to augment fund returns to the benefit of our clients.
Goldman Sachs and Merrill Lynch declined to comment.
Besides Goldman Sachs and Merrill Lynch, other banks that participate in
Danish div-arb deals include Deutsche Bank, UBS, JPMorgan and Citigroup,
according to the documents.
The banks declined to comment except for Deutsche Bank, which said its
transactions follow all applicable tax laws and reporting obligations in the
countries where the bank operates.
The div-arb deals in question only involve refunds of taxes which had
actually been withheld. Last year, the Danish public was shaken when Danish
tax authorities
disclosed(http://www.thelocal.dk/20150826/denmark-biggest-tax-scam-ever-inve
stigation) they had paid out billions of crowns in
refunds(http://www.thelocal.dk/20150925/danish-tax-authority-cleans-up-after
-scandals) for dividend taxes that had never been
paid(http://www.ey.com/GL/en/Services/Tax/International-Tax/Alert--Danish-Go
vernment-publishes-report-on-dividend-withholding-tax) . Those transactions
prompted the Danish government to launch fraud
investigations(http://www.wsj.com/articles/danish-tax-probe-targets-small-lo
ndon-hedge-fund-other-firms-1446674159) and halt
processing(http://www.skat.dk/SKAT.aspx?oId=2178493&vId=0) refunds of taxes
paid on dividends.
Under heavy scrutiny, the refunds slowly started again in March. But its
unclear whether sufficient safeguards have been put in place against div-arb
trades as authorities seem unaware of transactions like the ones reviewed by
ProPublica and Børsen.
The Danish Ministry of
Taxation(http://www.skm.dk/english/the-danish-ministry-of-taxation) said in
an email that it is not aware of such practice at this point, but that it
is currently investigating banks share lending activities with a
subsidiary agency known as SKAT(http://www.skat.dk/SKAT.aspx?lang=us) , the
Danish Tax Authority.
A working group convened by the regulators recently concluded that the
borrower of a share is not entitled to a tax reclaim, casting doubt on the
legality of any form of div-arb trades in Denmark.
Danish courts agree. The Danish National Tax Tribunal the highest
administrative court for tax matters in Denmark ruled in 2004 that lending
of a share does not change the fact that the original owner is obliged to
pay the dividend tax.
Taxwise, we have to maintain that the lender basically remains the owner of
the shares. So, if the lenders tax rate is 27 percent, then 27 percent
should be withheld in taxes. Thats the case law in Denmark, says Erik
Banner-Voigt, partner in the Danish law firm Bruun &
Hjejle(http://www.bruunhjejle.dk/english.aspx) and a specialist in
international tax law.
In May ProPublica revealed similar transactions in
Germany(https://www.propublica.org/article/wall-street-stock-loans-drain-1-b
illion-from-german-taxpayers) together with
Handelsblatt(https://global.handelsblatt.com/edition/422/ressort/finance/art
icle/report-commerzbank-helped-foreign-investors-bilk-german-taxpayers) ,
German broadcaster
ARD(http://www.br.de/mediathek/video/video/report-cumcum-english-100.html)
and The Washington
Post(https://www.washingtonpost.com/business/economy/the-wall-street-tactic-
that-cost-german-taxpayers-roughly-1-billion/2016/05/03/d53878d2-1090-11e6-9
3ae-50921721165d_story.html) . ProPublica conservatively estimated div-arb
cost German taxpayers about $1 billion a year. Afterwards, Germanys
Commerzbank which had been bailed out by taxpayers during the financial
crisis promised to stop facilitating div-arb
trades(https://next.ft.com/content/741df8aa-178f-11e6-b197-a4af20d5575e) .
The decision came as the Frankfurt general prosecutors office opened an
investigation(https://www.propublica.org/article/prosecutor-targets-commerzb
ank-for-deals-that-dodge-german-taxes) into the banks activities.
We are pulling out of this legal business because it is no longer socially
accepted, Commerzbank board member Michael Reuther said in an
interview(http://www.bild.de/geld/wirtschaft/politik/commerzbank-stoppt-steu
er-sauerei-45773958.bild.html) with Germanys Bild newspaper.
In June, German lawmakers passed a
law(https://www.propublica.org/article/germany-waves-auf-wiedersehen-to-cost
ly-wall-street-tax-scheme) that effectively shut down div-arb in Germany,
which had been the biggest market for such deals.
But its still possible to book such deals in many other markets, including,
it seems, Denmark.
The Danish State Lost a Fortune in Record Maersk Dividend
Though the individual sums may seem small, there is a lot of money involved
in div-arb deals, especially for big corporations like Maersk.
On April 7, 2015, Maersk paid out 1,971 Danish crowns per share ($293) to
its investors in two payments that together added up to one of the biggest
dividends in Danish history. The massive payment followed the sale of the
conglomerates stake in Danske
Bank(http://www.maersk.com/en/the-maersk-group/press-room/press-release-arch
ive/2015/2/press-release-danske-bank) .
A few days before the dividend was paid out, 1.3 million Maersk shares were
on loan, according to data from S&P Global Market Intelligence apparently
with the sole purpose of avoiding the Danish withholding tax.
Altogether, around 6 percent of Maersks shares were on loan when the
dividend was paid out to shareholders of record. The amount was unusually
high: Less than 0.5 percent of the shares were on loan in the three months
before and after the dividend payment, stock lending data from S&P shows.
The best explanation is, that it has to do with taxes, says Otto
Brøns-Petersen(https://www.cepos.dk/personer/otto-broens-petersen) , former
director at the Danish Tax Ministry and now head of research at
CEPOS(https://www.cepos.dk/) , the Danish think tank.
Denmark lost 350 million Danish crowns ($52 million) in tax revenue because
of the Maersk share loans, according to a CEPOS estimate for Børsen based on
the S&P data.
The Maersk shares were not the only ones on loan over the dividend record
date, when shareholders are identified for payment. In 2015, similar surges
are visible in biotech giant Novozymes(https://www.novozymes.com/en) ,
jewelry maker Pandora(http://www.pandora.net/en-us) , wind turbine producer
Vestas(https://www.vestas.com/) , insurance provider
Tryg(http://www.tryg.com/en/home/index.html) and others, S&P stock loan
data for Denmarks top 20 most-traded stocks
shows(http://markets.ft.com/research/Markets/Tearsheets/Constituents?s=OMC20
:CPH) .
Altogether, CEPOS estimated that Denmark lost 400 million crowns ($60
million) because of dividend arbitrage in 2015. CEPOSs Brøns-Petersen said
several assumptions used to craft the estimate could make the figure higher
or lower.
S&P would only provide a tally of shares on loan in any security as of the
first of each month, making it impossible to identify spikes in
lending(https://projects.propublica.org/graphics/dividend) for companies
that pay dividends later in the month. Because of this, some of the
potential losses do not show up in the analysis.
The estimate also assumes a tax rate of 15 percent on dividend payments,
which is only available to foreign investors covered by tax treaties with
Denmark. Investors not covered by such treaties can avoid a 27 percent tax
bill by lending out their shares around dividend time.
It is likely a low estimate, Brøns-Petersen said.
Everyone Knows It Is About Taxes
Investors like Vanguard say they dont seek out div-arb transactions: They
simply make shares available for borrowing and let market demand drive
activity. The goal is to earn extra income in the form of lending fees from
shares of stock Vanguard is holding for clients in its vast array of mutual
funds.
We are not proactively and systematically identifying dividend-paying
stocks and shopping them to borrowers before a dividend payment, a Vanguard
spokesman previously told ProPublica in regard to German div-arb
deals(https://www.propublica.org/article/a-wall-street-deal-that-turns-taxes
-into-profits) . Vanguard is a passive lender; our funds lend only in
response to market demand from brokers with the goal of seeking to augment
returns for our shareholders.
Børsen showed examples of the trades to Torben Bagge, a prominent tax
attorney at the Danish law firm Tommy V. Christiansen(http://www.tvc.dk/en)
. Bagge said taxes appear to be a motivation for deal participants.
The excerpts of the material I have seen suggest that what they think about
is tax, he said. It is worrying that reputable banks and firms seem to
assist in organized tax speculation against the Danish treasury.
One former employee who arranged div-arb deals at a major bank in Denmark
said everyone knows it is about taxes. Competition for customers puts
pressure on bankers to arrange the deals or risk losing business, he said:
If everyone else is doing it and getting a risk-free return each year, the
other managers are forced to do it as well.
The employee, who spoke on condition of anonymity to protect his current
position in the financial sector, said div-arb has been taking place in
Denmark for at least ten years. Over time, that means small amounts of tax
revenue lost on each deal could have added up to big losses for Denmark.
But just as those small amounts matter to Danish taxpayers, banks also care
about every penny of revenues they can derive from the trades.
Last year, for example, revenues from Danish div-arb deals fell at one bank.
The flagging revenues prompted a senior executive to ask his traders to
aggressively book trades to capture what amounted to less than half a
million dollars in additional revenues, an email shows.
The executive wrote to his traders: We cannot leave any revenue on the
table.
ProPublica is a Pulitzer Prize-winning investigative newsroom.
Neither Snow Nor Rain
Hooked on Fossil Fuels Forever
UK Could Warm By 4 Degrees Celsius This Century
New Poll Shows Hillary Clinton Tied With Donald Trump
Truthdig: Drilling Beneath the Headlines
© 2016 Truthdig, LLC. All rights reserved.
Signup for Truthdig's newsletter
