How Barclays turned a $10 billion profit into a tax loss

Fri Apr 29, 2016 7:36am EDT
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By Tom Bergin

LONDON (Reuters) - When Barclays Plc (BARC.L: Quote) sold a fund management business to U.S. financial group Blackrock Inc. (BLK.N: Quote) in 2009, the larger-than-expected $15.2 billion price tag was not the only good news for the British bank's investors.

The way Barclays structured the sale -- by booking part of the proceeds in Luxembourg -- allowed it to do something not possible under most tax systems: generate a tax loss from a tax-exempt transaction, a Reuters analysis of previously unreported company filings and statements shows.

The move has helped Barclays to earn billions of dollars almost tax free.

The entirely legal deal is the latest example of the ways in which some companies are able to benefit from tax regimes that regulators around the world are trying to crack down on so they can raise more tax revenue at home.

The small European state of Luxembourg is among those coming under scrutiny for its tax regime that local authorities and lawyers say is a legitimate way to attract business.

Barclays' tax loss was made possible because it sold its Barclays Global Investors (BGI) business tax free in Britain, but had part of the sale proceeds -- $9 billion in Blackrock shares – paid to a subsidiary in Luxembourg.

That way, Barclays was able to offset the risk of the shares losing value, something not normally possible in a tax-free deal. A rise would have netted Barclays profits. When instead the shares fell, Barclays used the loss to claim a tax deduction in Luxembourg that was not available in the UK.

Barclays' subsidiary in Luxembourg, one of Europe's smallest states with just half a million people, lost $2.6 billion when the Blackrock shares fell, but has earned almost double the amount virtually tax free since 2012, partly by offsetting some of the Blackrock loss.   Continued...

A man passes automated teller machines at a Barclays bank branch in London August 30, 2012. REUTERS/Neil Hall