“The number, like all such numbers, is an estimate.”

No, it is not an estimate and at very best it is merely a guess.

The original BIJ article is bare assertion without a single solitary fact to support it. It might be true, it might be complete fiction – without facts nobody knows.

“We have a tight comments policy aimed at fostering constructive debate.”

With respect, it is a pity that your contributions policy is not as ‘tight’. The BIJ article will be believed by those who want to believe it and ignored by most others. What it will not do is foster constructive debate.

Something has gone wrong with the article – some of the text is inside “a” tags, which have screwed up the formatting.

so what’s the bottom line – if you own a share that pays a dividend, you would normally have to pay tax on that dividend, but if you lend the share out there is a way of you still receiving the dividend but not paying the tax? Sounds believable – another loophole that needs closing.

But that’s not what dividend arbitrage is generally understood to be. I’m not an expert, but I understand dividend arbitrage as buying shares just before they go ex-dividend, with an equivalent number of put options (from the same or a different party – usually the latter); get the prices right and you guarantee a profit, taking account of the dividend. Get them wrong, and you lose out; and if the purchase and put are with the same person, they have just crystallised a taxable profit/loss on those shares – again, possibly good, possibly bad.

How does your version work? How can a “loan” pass the right to receive the dividend, without the transaction having its own tax significance?

This is an absolutely hopeless article because it doesn’t in fact make clear what is actually going on.

What with holding tax are we talking about? The EU one on interest and dividends (does it even extend to dividends?) being paid to EU residents?

Or the more specific taxes on, say, French dividends?

If it’s the EU tax then the dividend washing doesn’t in fact avoid any tax. Because the tax is not with held on payments to non EU residents anyway, and any EU resident will just end up paying home country tax on receipt of the dividend.

So there’s a bit of a timing issue but that’s all.

If it’s the specific (say) French dividend tax, then such dividend washing doesn’t sound like it’s going to help at all.

http://www.hmrc.gov.uk/manuals/dtmanual/dt7259.htm

Because under home country tax laws you get a credit for the with held tax anyway. And the tax is with held whether you’re EU or non-EU company. So washing it through a tax haven doesn’t help in the slightest.

In fact, the explanation of what is going on is so garbled that I wouldn’t be at all surprised to find out that the original reporter has got it the wrong way around entirely. And our tax expert here hasn’t noticed.

Dividend washing isn’t about, or at least when it was done here in the UK it wasn’t about, avoiding a with holding tax on a dividend. It was a way of converting dividend income into a capital gain. You sell the shares just before they go ex-dividend at the inclusive of dividend price and then buy them back as soon as they’re ex-dividend. The price is obviously lower. But instead of you getting your dividend as income (taxed, let us not forget, some years at 98%) you’ve received it as a capital gain, taxed at say 40% or whatever.

What drove it was that sort of tax shifting from individuals and on the other side were the insurance and pension funds who were quite happy to collect dividends as they are tax free to them.

But as I say, the article is so badly written that it’s not possible to work out what people are actually doing.

Do you think we might be able to find a tax expert somewhere who could write a blog post to explain it to us?

this seems very strange – how can a dividend be paid other than to the owner of the shares as listed in the company’s share register? If the owner loans them to someone else, does he somehow lose beneficial ownership of those shares and how is that notified to the company or its registrars?

How can a company pay a dividend to someone other than the owner of the shares as listed on its register? If the owner lends the shares, does he lose beneficial ownership? How is that notified to the company’s share register?

Richard Murphy is to truth and accuracy what Herod was to childcare.

‘a new economic order that is stable and sustainable is to be built’

Anyone else think that a new economic order run by people like Murphy who clearly struggle to both communicate and add up would be a nightmare?

Cheating bas****s. Makes me so ashamed that anyone would think of me as british.

@ 9

yeah, that line got me too:

‘a new economic order that is stable and sustainable is to be built’

Murphy is a Keynesian, isn’t he? The whole point of Keynesianism is ‘to hell with the long-run’, so hardly stable or sustainable.

Richard Murphy, please f•ck off and leave those of us who create wealth alone.

“A new economic order that is stable and sustainable” are you serious Murphy? That’s what we already have. Entrenched privilege, a compliant media, the increasing concentration of wealth and power in the hands of a myopic and talentless few and their demented apologists. What could be more stable and sustainable than that? Stable and sustainable until somebody lights a match, and then? The 2011 riots? Hors d’oeuvre old chap, hors d’oeuvre…..

@ Josef, Tim Worstall etc,

You were wondering if this tax dodge really exists and if it creates wealth. The answer is yes it does exist and no it doesn’t create wealth for anyone, apart from the traders. It’s big business and appears mostly parasitic.

Here is a quote from the textbook “Introduction to Securities Lending” by Mark Faulkner, the grand-daddy of securities lending:

“Another large class of transactions … comprises those motivated by lending in order to transfer ownership temporarily, an arrangement which can work to the advantage of both lender and borrower. For example where a lender would be subject to withholding tax on dividends or interest but some potential borrowers are not. The borrower receives the dividend free of tax, and shares some of the benefit with the lender in the form of a larger fee or larger manufactured dividend”.

The article Richard Murphy is writing about is simply the European equivalent of a 100bn tax abuse that the US closed down a couple of years ago.

If you want to read more about how it works, read this 2008 US Senate report citing Lehmans, MS, DB, UBS , ML and Citi http://levin.senate.gov/imo/media/doc/supporting/2008/091108DividendTaxAbuse.pdf

“Each year, the United States loses an estimated $100 billion in tax revenues due to offshore tax abuses. The U.S. Senate Permanent Subcommittee on Investigations has examined various aspects of this problem, including how U.S. taxpayers have used offshore tax havens to escape payment of U.S. taxes. This Report focuses on a different subset of abusive practices that benefit only non-U.S. persons, have been developed and facilitated by leading U.S. financial institutions, and have been utilized by offshore hedge funds and others to dodge payment of billions of dollars in U.S. taxes owed on U.S. stock dividends.

“Using phrases like “dividend enhancement,” “yield enhancement,” and “dividend uplift” to describe their products, U.S. financial institutions have developed, marketed, and profited from an array of transactions involving multi-million-dollar equity swaps and stock loans whose major purpose is to enable non-U.S. persons to dodge payment of U.S. taxes on U.S. stock dividends.

“In addition, many of the offshore hedge funds that have benefited from these abusive transactions appear to function as shell operations controlled by U.S. professionals who are helping them dodge U.S. dividend taxes.

Ben,

I know this used to happen in the UK too. I even remember when it was stopped.

My complaint isn’t that dividend washing never happens. I’m trying to get someone to explain to me exactly what is happening in this case. Because dividend washing from one EU entity to another doesn’t make much sense given the two possible dividend taxes we’re talking about. Either the EU one or the various domestic ones.

And given that R. Murphy, the author of this blog post, is a proclaimed “tax expert” I was hoping he could turn his stellar intellect to elucidating for me what is actually happening here.

@OP, Richard Murphy: “…he has exposed a new type of tax avoidance activity centred on the City of London over the weekend.”

Do you mean that there is a form of tax avoidance that can only be conducted on Saturday and Sunday? How does this work between time zones and countries/religions?

@Tim

I’m told there is a lot of fiddly offshore stuff and the structures change often, but people in the business are understandably reticent about how exactly it works. It must still be widespread though, given the Q1 stock lending figures in the Observer article. If you have Cayman Island contacts perhaps you can ask them and share the mystery?

By the way, with no withholding tax in the UK it’s mainly continental taxayers that pay.

Dear Tom Worsthall,

Dividend washing

Do you know how sleazy that sounds?

Could you please stop apologising for what is essentially, theft?

Knowing the rules is no excuse for expoiting them.

17 Ben

I’m as puzzled by this as Tim. Dividend arbitrage is a way of trying to profit from transient share pricing inconsistencies at dividend payment time – hence the name. The tax implication of this activity is – as others have said – simply that as the dividend is foregone there is no income tax, but there will be capital gains tax instead, so there could also be a tax benefit from differences between income tax and CGT. So far, so legal, and enough in itself to explain a large part of the stock lending spike, I’d suggest.

I’m trying to work out why there would be any need to “wash” these activities through offshore centres given that the UK does not impose withholding taxes on dividends. If all they were doing was trying to avoid income tax on dividends, I would have thought the UK transaction would be sufficient. Are they in fact trying to avoid CGT?

Frances_coppola

Not UK tax at all – it’s European div taxes being avoided.

Goes something like this: long only fund in Europe who would normally pay a dividend tax transfers ownership temporarily by a swap or stock loan to an offshore hedge fund who pays no div tax, over the relevant date, and the hedgie shares the “saving” with the original owner via the lending fee/spread.

It just happens to be organised from London

20 Ben

I know perfectly well it is EU taxes that are apparently being avoided. I’m simply pointing out that avoiding this tax should not require an “eyewateringly complex” network of offshore transactions, as the Observer article claims. Washing it through the UK alone is enough, since the UK does not impose withholding taxes on dividends so is effectively “offshore” for these purposes. Hence my question about whether what is in fact being avoided is capital taxes on arbitrage profits. The UK does tax these.