The ruling turns a spotlight on an aggressive tax-cutting strategy created last decade by AIG Financial Products and bankrolled by several European banks.

The strategy involved trading derivatives with the aim of generating capital losses and foreign tax credits for large corporations, like HP, which then used them to try to lower their U.S. tax bills.

Judge Joseph Goeke of United States Tax Court in Washington, D.C., ruled against HP, which had sued the IRS in 2009 seeking the refunds.

The strategy, broadly known as a foreign tax credit generator, involves complex investments by large U.S. companies in foreign entities, typically in low-tax jurisdictions. The companies claim on their U.S. tax returns offsetting, or tax-lowering, credits for payments they make or owe to foreign tax authorities on the investments.

The IRS contends that many foreign tax credit generators lack economic substance and are engineered to create artificial financial benefits that are not valid for IRS deductions. The IRS outlawed many foreign tax credit generators around 2007. An IRS spokewoman declined to comment on the HP ruling.

HP’S AIG STRATEGY USED ABN-AMRO

The AIG-FP strategy used by HP involved a Dutch entity, called Foppingadreef, that was created by AIG-FP in 1996 and funded by Dutch bank ABN-Amro.

In his 82-page opinion, Judge Goeke wrote that HP’s investments in Foppingadreef in 1996 were not valid for more than $15.5 million in capital-loss deductions claimed by HP in 2003 because the investments were not real economic bets. Instead, the judge wrote, HP’s stakes in the Dutch entity were carefully structured loans made by HP to and via the entity, which paid back HP.

“HP’s investment is more appropriately characterized as debt, rather than equity, for Federal income tax purposes,” the judge wrote. That legal language echoes rulings of previous years that outlawed retail-investor tax shelters with names like Son of Boss.

Foppingadreef also generated for HP at least $178 million in tax savings in so-called indirect foreign tax credits that are not allowed, according to the ruling.

Indirect foreign tax credits are tax offsets created by interest, dividends and other investment returns. Because Foppingadreef was not an equity investment, and instead was a debt vehicle, the indirect foreign tax credits claimed by HP were not valid for deductions, the ruling said.

DUTCH ENTITY BLESSED BY LAWYERS

Foppingadreef was incorporated in the Dutch Antilles, a Caribbean tax haven, with lawyers from Sullivan & Cromwell and Skadden, Arps blessing the entity. AIG-FP sought legal advice for the entity because, the judge wrote, “AIG-FP understood that in order for the transaction to be marketable, it would need to be reviewed by others to ensure that it had broader appeal.”

Spokesmen for the two law firms could not be reached for immediate comment.

The AIG-FP financial engineer who created the transaction, Robert Findling, wanted to use differences between European and U.S. tax treatments of a certain type of interest payment “to model a foreign investment that would generate a stream of preferred dividends and produce significant foreign tax credits,” the judge wrote.

Foppingadreef generated the losses and credits by trading in various derivatives, including warrants and swaptions. AIG-FP, which is based in London, could not be immediately reached for comment.

One day after the 1996 incorporation, AIG-FP closed a planned deal to sell a major stake in Foppingadreef to ABN-Amro. A spokesman for ABN-Amro could not immediately be reached for comment.

In 1996, AIG-FP began pitching Foppingadreef to clients as an attractive tax-advantaged investment. Over a series of meetings last decade, Foppingadreef was reviewed by HP’s treasury, legal and tax departments in Palo Alto, Calif., at company headquarters, and approved at the highest levels of the company. A spokesman for HP declined to comment on the ruling.

In early 2004, HP transferred its shares in Foppingadreef to ABN-Amro, and claimed a capital loss of more than $15.5 million. The judge wrote that the entire transaction was not an investment because in part it was designed to allow HP to cash out its stake effectively, a loan at a pre-determined date.

In a separate lawsuit filed against the IRS in Tax Court in 2009, HP is seeking to recover an additional $248.5 million in taxes and interest it paid in 1994, 1995 and 1998.

These are the third ‘retail’ corporate bonds which have been issued by the supermarket giant, and brokers have predicted that they will prove to be just as popular as previous issues.

Retail bonds aimed specifically at private investors are very different to savings accounts. Investors who enter into these bonds will not have the protection of the Financial Services Compensation Scheme, and if a scenario occurred in which Tesco went under, all capital placed in the bonds would be lost.

The scheme is similar to an investment in Tesco’s shares, however, as with these bonds the retailer has promised a regular annual payment and return of the capital at the end of the term in 2020.

In the meantime, investors are at liberty to sell their bonds, but their value will change and fluctuate according to how desirable investors find them at the specific time

Previous bonds from Tesco are in demand at the moment, so investors in these are currently sitting on small capital gains, and enjoying the continuing interest.

Peter Day, a partner at Killik, said that “In the current low interest rate environment, this bond offers an attractive yield backed by a stable, well-capitalised business.”

But the cull will also include hundreds of investment salesmen in branches.HSBC employs more than 50,000 staff in its British operations, so the cull represents around 4 per cent of its workforce.

The move comes just weeks after HSBC posted a £13.8billion profit and handed its boss Stuart Gulliver a pay package worth £8million.

David Fleming, spokesman for the Unite union, said: ‘Bank staff deserve so much more than this awful treatment by HSBC or any other employer. ‘How can this bank consider staff cuts when it was the workforce that delivered it a profit of £13.8billion?’

He added: ‘The hypocrisy of CEO Stuart Gulliver taking home £8million, while talking up job losses in order to save money, will not be lost on the workforce.’

Unlike state-backed rivals Lloyds and Royal Bank of Scotland, which have slashed tens of thousands of jobs, HSBC remains hugely profitable.

But Mr Gulliver aims to shed 30,000 jobs worldwide by 2013 – 10 per cent of its workforce – as it looks to save £2.4billion a year. Last year HSBC cut 7,000 jobs outside the UK, leaving it with 288,000 employees.

It is also sacking hundreds of investment advisers in branches in response to a ban on commissions designed to present future mis-selling scandals. This will be enforced by the City watchdog at the end of the year.

Source -DM

The Bank’s figures, described by one expert as horrific, highlight the nightmare facing small firms which urgently need money to survive or expand. Its authoritative report reveals lending to small companies has been falling for nearly three years.

Since October 2009, lending to small firms has dropped every single month, compared with the same month in the previous year.

The latest figures, published yesterday, show it was 3.9 per cent lower in February compared with last year, when it was also lower than in February 2010.

To make matters worse, the interest rate being charged by the banks has jumped to the highest level since the Bank cut the base rate to an historic low of 0.5 per cent in March 2009.

At present, the smallest firms in Britain are being charged an average interest rate of 4.83 per cent – nearly ten times the base rate. Lord Oakeshott, a leading Liberal Democrat peer, said: ‘These small business lending figures are simply horrific.

The banks keep charging more and lending less to [small firms].

‘Why can’t the Treasury see that the economy and jobs can’t motor while they let the banks keep siphoning the petrol out of small businesses’ tanks?’

The report comes just days after MPs warned small firms are facing ‘serious and often insurmountable problems’ in getting money from banks at a ‘reasonable’ rate.

The report, from the Treasury Committee, also raised doubts about the Government’s latest attempt to send a financial lifeline to small firms.

MPs said they were concerned that the National Loan Guarantee Scheme ‘was not designed to solve the problem that many small firms, who may be reasonable credit risks, are unable to access bank funding at all in the current market conditions’.

The scheme involves the Government guaranteeing up to £20billion of cheaper loans to small firms. The money, which will be handed out by banks such as Barclays, Santander and Royal Bank of Scotland, will be offered at a lower rate than businesses could normally obtain.

The Government’s previous scheme, Project Merlin, also failed after banks promised to hand out a gross target of £76billion to small firms but fell short by more than £1billion.

In July 2010, the Daily Mail launched its ‘Make the Banks Lend’ campaign to highlight the problems facing small firms.
John Walker, national chairman of the Federation of Small Businesses, said: ‘It is clear that more still needs to be done.’

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In a bitter blow to millions of households, deputy governor Paul Tucker said Britain will be stuck with high inflation for much of 2012.

The stark warning from Mr Tucker – who is among the favourites to succeed Sir Mervyn King as governor next year – dashed hopes that the worst squeeze on household incomes since the 1920s will come to an end any time soon.

The Bank also warned that Britain could already be in the midst of a nine-month recession before recovering in the second half of the year.

The gloomy verdict comes as cash-strapped families struggle to make ends meet in the face of muted wage growth and soaring prices.

Savers – who have been hammered since interest rates hit lows of 0.5 per cent more than three years ago – are also suffering as no high street savings accounts are currently beating inflation.

And millions of thrifty pensioners have seen their retirement plans shattered by the Bank’s £325billion money printing programme

Official figures yesterday showed the average pay rise across the country is just 1.1 per cent – well below inflation, which rose from 3.4 per cent in February to 3.5 per cent in March.

Scott Corfe, senior economist at the Centre for Economic and Business Research, said: ‘Household incomes continue to fail to keep pace with the rising cost of living, implying an ongoing erosion of living standards.’

In February, the Bank forecast that inflation would fall to the official 2 per cent target later this year, having peaked at 5.2 per cent last September.

At the time, Sir Mervyn said: ‘With falling inflation and the prospect of an end to the squeeze in real incomes leading to a recovery in growth, we are moving in the right direction.’

But Mr Tucker yesterday admitted there had been ‘bad news on the inflation front’ and it ‘remains uncomfortably above target’, dealing a blow to hopes of recovery.

He told a conference in Liverpool: ‘I think inflation might remain above 3 per cent throughout the second quarter of this year and possibly into the second half of the year.’

Simon Ward, chief economist at asset management firm Henderson, said the Bank was on course for another ‘forecasting miss in 2012’.

He warned that even the projection that inflation would finish the year at 2.75 per cent may be too optimistic.
The Bank is likely to have to ratchet up its predictions once again in next month’s Inflation Report, in another embarrassing revision to its forecasts.

Mr Tucker blamed a 5 per cent rise in oil and gas prices since February and a host of tax changes in last month’s Budget, including a 37p rise in cigarette duty.

‘Already in February there was a risk that inflation might fall back towards target less quickly than incorporated into our “most likely” central outlook,’ he added.

Mr Tucker’s comments suggested that the Bank will not sanction printing any more money through its controversial quantitative easing programme.

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Some 19% of people with savings and investments worth more than £250,000 are considering a new life overseas, which is up from 17% six months ago and 14 per cent a year ago.

The figures suggest that at least 500,000 people with that level of personal wealth may leave the UK in the next two years.

Investing in improving the infrastructure, such as roads, railways and communications networks, is seen as the most important way to make the UK a more attractive place to live, with 61 per cent of wealthy people choosing this option.

But cutting regulatory red tape for businesses, lowering taxes and improving public services such as healthcare, education and the police were all high on the agenda.

Nicholas Boys-Smith, director at Lloyds TSB International Wealth, which carried out the survey, said: ‘While the figures strongly suggest we won’t see a mass exodus, it is clear that a significant and growing minority see opportunity and a better quality of life overseas.’

Crime and anti-social behaviour is the most popular reason for people to contemplate leaving the UK, chosen by 56 per cent.

While the figures do reveal that a minority of wealthy people are discontent about life in the UK, a majority of 62% said they are currently happy with the UK as a place to live.

Some 42% of wealthy Britons think the UK offers a worse quality of life than other developed countries, while 41% think life in Britain is generally more stressful than life overseas.

Source – DM

If you are a higher rate taxpayer that currently receives child benefit payments you could lose thousands of pounds a year when changes to child benefit come in to effect in April 2013.

Depending on how much you earn it may be possible to reduce your taxable income below the 40% higher rate tax threshold so you still keep these payments.

Here are your options:

Invest in a pension

The quickest and probably the easiest way to keep your child benefit is to increase, or begin making contributions to a pension.

This should be done by salary sacrifice and can be paid into an occupational pension run by your employer or to an independent personal pension.

Doing this will reduce your taxable pay and, depending on your contribution, could bring you beneath the higher tax rate threshold so you get to keep your child benefit payments.

If you have a family to clothe and feed, you may feel that paying into a pension is lower down your list of priorities, however putting more into your pension could leave you better off come April 2013.

For a family with 3 children, child benefit is currently worth £2,449.20 a year, so paying an extra £1,000 or £2,000 in pension contributions would not only boost your retirement savings but is likely to leave you better off overall as well.

There are two main was to set this up, either by simply increasing the amount of your salary that is paid into your pension, or by sacrificing a part of your salary (perhaps a pending pay rise) in exchange for greater pension contributions from your employer.

Throw into the mix the tax relief that you get when you pay into a personal pension and opting to keep under the higher tax threshold this way can be very tax effective.

Childcare vouchers

Purchasing childcare vouchers from your pre-tax pay is another way to reduce your taxable income and could help you keep your child benefit.

Childcare vouchers can be used to pay for registered childcare at a nursery, playschool, childminder or after-school club.

Basic rate tax payers purchasing childcare vouchers for the first time can buy up to £55 of vouchers a week. So if your current salary is just over the higher rate threshold it’s worth investigating this option.

Buying the full £55 a week of childcare vouchers could reduce your taxable income by £2,916 a year, which may be a sufficient amount for you to be classed as a basic rate tax payer.

This is because tax-exempt benefits like childcare vouchers are excluded from the tax rate assessment. So, for the purpose of childcare vouchers, you can earn up to £45,391 a year before being classed as a higher rate tax payer.

Even if your child is too young to be left in child care, you can still purchase vouchers and use them at a later date. Although each voucher will have an expiry date they tend to last a long time.

Register as a company

Reducing your pre-tax salary by purchasing childcare vouchers or investing in a pension will be the two options open to most people worried about losing their child benefit payments.

However, depending on your circumstances and terms of your employment you may be able to keep you child benefit by setting up a company.

Essentially this involves setting up your own private limited company, paying yourself a minimal salary and declaring the rest of the money you earn as dividends from your company.

However, this option is best suited to the self-employed as well as freelancers and consultants not directly employed by a business and simply isn’t an option if you are a full time employee earning an annual salary.

This option could also make your personal finances considerably more complicated so you may need to seek advice from an accountant to ensure you are paying the correct levels of tax on all areas.

Change your working patterns

If you or your partner are a higher rate tax payer but the other perhaps works part time or stays at home, it may be worth considering changing your working patterns so you remain eligible for child benefit payments.

The higher earner could take advantage of flexible working arrangements or switch to lighter working hours to drop below the income threshold, while the lower earner could look at increasing their hours if they work part time, or finding some other means of making up the difference.

While this may not be a feasible option for some couples, balancing your salaries a little more evenly could mean you get to keep the child benefit payments and leave you better off overall.

Salary sacrifice?

You may think that you can sign up for a host of different salary sacrifice schemes in order to reduce your income.However company cars, phones and other benefits are considered to be benefits-in-kind and part of your salary.

This means that you don’t get the same perceived salary deduction as with paying into a pension or purchasing child care vouchers.

Take a pay cut?
Taking a pay cut to reduce your income below the higher rate tax threshold so that you can keep your child benefit may seem like the easiest option.

However, while doing this could mean you lose less than doing nothing at all, paying the money you would have scarified into a pension would essentially have the same effect.

Regardless of your attitude to pensions, investing in your future in this way will leave you better off rather than just sacrificing the money so it’s very much worth considering.

Before you take any action to reduce your taxable income it’s important to research the full implications so that you make the right decision for your household finances.

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There are several types of loans available. To name just a few: unsecured loans, secured loans, car loans and debt consolidation loans.

A loan is a type of credit – and therefore it must be repaid. Repayments are usually made on a monthly basis, and will continue until the loan (plus any interest) has been repaid.

Unfortunately, at a time like now, many people are finding repayments particularly hard to make, whether it’s because they’ve suffered a drop in income or because their essential expenditure has risen.

Help with your payments

However, there is help available. This help could come in the form of budgeting advice – in other words, advice on how to manage your finances more successfully.

Budgeting is all about managing, controlling and understanding your finances. It involves keeping track of your income (the money you receive/earn) and your expenditure (the money you spend).

• Your total income should include everything your household receives/earns: salary, benefits, grants, etc.

• Your total expenditure should include your priority debts and essential costs of living: your mortgage/rent, your utility bills, secured loan payments, etc. It should not, however, include the cost of servicing your non-priority debts (unsecured loans, credit cards, etc.).

By subtracting your total expenditure from your total income, you will be left with your disposable income. This is the money you can use to service your non-priority debts each month and (if you have anything left) to save and spend on non-essential goods and services.

If your disposable income is not enough to cover the cost of servicing your loan/debts, then you should take immediate action. You may wish to start by contacting a professional debt adviser.

A report by the Institute of Economic Affairs found that stimulus measures pursued by Western governments in response to the economic crisis did not work.

Shadow Chancellor Ed Balls has repeatedly called on the Government to soften its deficit reduction plans and embark on a ‘Plan B’, which would include more public spending in an attempt to boost growth.

But the institute’s study said Plan B would be disastrous for the British economy, and that all Western economies needed drastic fiscal and tax reform if they were to overcome their sovereign debt crises.

Mark Littlewood, director general of the Institute of Economic Affairs, said: ‘We must resist the calls of those who say that one last, big spending push could get the economy back to meaningful growth.

The opposite is true.

‘Many Western economies might well be tipping back towards recession partly because of these giant fiscal packages that were enacted in 2009, and the coalition Government must resist calls for any Plan B that involves more government borrowing and spending.

‘The Government must be firm on deficit reduction – in fact it should go a lot further, and should look to robust supply-side reform to boost growth.’

The study concluded that the negative effect of Labour’s stimulus package in 2009 might even be being felt now, and that the UK might be experiencing faster growth if Labour had not increased spending.

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Maybe not its total evaporation, but certainly shrinkage with peripheral or weak countries falling off the currency’s map and in all cases, according to the experts, with a heavy price to pay.

Analysts agree that no country would emerge unscathed, at least in the short term. As for the long term? Well, few even dare to imagine the fall-out.

In the view of London-based Capital Economics, even a limited re-drawing of the eurozone’s borders, with the exit of the bailed-out trio of Greece, Ireland and Portugal over the next two years, would trigger a drop in eurozone gross domestic product (GDP) of 1.0 percent in 2012 and 2.5 percent in 2013.

That would equate to the same sort of economic contraction endured between 2008 and 2009 following the financial crisis triggered by the collapse in the US home loan market.

In a recent note to investors, UBS bank calculated that if a “weak” euro country like Greece gave up the currency it would cost every man, woman and child there some 10,000 euros (more than 13,000 dollars) each in the first year, and thousands more over the adjustment period.

Even a “strong” country like Germany would see a loss of between 6,000 and 8,000 euros per head in year one — between one quarter and one fifth of the country’s annual economic output.

According to Jens Nordvig of Japan’s Nomura Securities, Germany’s currency would rise against the dollar, but Greece would lose 60 percent of its money’s value. Italy, Spain or Belgium would lose around a third each.

While scope for exports would improve, debt restructuring on that basis would mean a dramatic rise in borrowing costs for those governments who write off the most.

National banking systems would collapse, experts say, due to a loss of confidence in the value of the currency that replaced the euro.

This isn’t rocket science panicking over hard-earned savings, experience shows citizens pull out what they can and flee while companies would struggle to raise investment capital.

If the economy stopped functioning normally, there would then be the threat of widespread social unrest. Germany, meanwhile, would lose export business due to a rising national currency and also the emergence of new, cheaper European competition.

It would be no different in the event Italy or some other big eurozone economy left.

Jacques Cailloux, a Paris-based economist with the Royal Bank of Scotland, told AFP that were France to exit the eurozone, Germany would suffer because “its banking system would be staring at exposure to French banking debt worth some 200 billion euros”.

US banks would be looking at 10 times that amount, Cailloux added ominously. Looking further down the line, Capital Economics believes prospects for ex-eurozone economies “may be improved by the ability of (these) former member states to set their own policy and allow their currencies to fluctuate.”

Wages would not have to drop under a devaluation, while suddenly a bottle of ouzo would not cost as much for others to import, for example.

“It’s hard to put a price on it, but clearly it would mean a huge cost, if not quite apocalyptic,” Cailloux said of the price for even partial eurozone break-up.

British banks and Asian-based multinational companies are already engaged in prudent contingency planning for the worst-case scenario.

And as Cailloux says, the problem is “everyone is going to have to plan for this eventuality, that’s the issue for 2012″.

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