A 77 page report by the Senate permanent subcommittee on investigations, says the strategies enabled investors to avoid paying the 30 percent withholding tax on income by treating dividend payments as returns on “equity swaps,” stock loans, or other derivatives transactions, according to The Financial Times.
The I.R.S. has been put under pressure by the committee to increase efforts to stop complex offshore arrangements that let foreign citizens avoid taxes on dividends paid by American companies, according to The New York Times.
Transactions by Lehman Brothers, Morgan Stanley, Citigroup, Deutsche Bank, UBS, and Merrill Lynch are included in the report. Carl Levin, chairman of the subcommittee, said the avoidance tactics have cost the government billions in taxes over the past 10 years. The report indicates that more than $500 million of tax savings admitted by the companies between 2000 and 2007, according to FT.
“These are gimmicks which are peddled by American financial institutions and designed, concocted and peddled to deny Uncle Sam the taxes that are owed under our law,” said Levin.
Lehman’s emails and internal documents estimated that in 2004 alone, its transactions enabled clients to avoid as much as $115 million in dividend tax payments.
Douglas H. Shulman, the I.R.S. commissioner, told the subcommittee that stock swaps and loans could be complex, but that his agency would be adamant in their efforts to disclose financial institutions that deliberately avoided paying taxes.