German Finance Minister Cries Foul Over Tax Avoidance Deals
Cezary Podkul (ProPublica) 05 May 2016

The German government may not be able to recover billions of dollars in lost dividend taxes from complex stock-lending deals that benefited U.S. and other foreign investors


Germany's top finance official criticized controversial stock loans that allow U.S. and other foreign investors to avoid paying about $1 billion a year in dividend taxes in Germany.


"I think we made very clear that we were not happy about these activities," Finance Minister Wolfgang Schäuble said Wednesday. He strongly suggested that banks discontinue the practice: "I am sure that all responsible banks and their boards will deal with this topic."


Schäuble's statement came a day after publication of a joint investigation by ProPublica, the Washington Post and the German news outlets ARD and Handelsblatt about the trades, which are arranged by U.S. and other banks using stocks borrowed from investment managers like Vanguard and BlackRock.


One major German player in the transactions 2014 Commerzbank, Germany's second largest bank 2014 has since said it will discontinue such deals even before a proposed law to end them can be adopted.


But the larger question of whether Germany will get back the billions it lost remains unanswered. Schäuble said Germany cannot claw back taxes that were avoided in legal securities lending. Though Schäuble called the trades "not legitimate," experts differ on whether they are forbidden under current law.


Revelation of the bank's participation in div-arb put Schäuble in an awkward spot. The government owns 15 percent of Commerzbank and has two seats on its board thanks to a 2008 bailout. And while taxpayers lose on the stock deals, they make money for Commerzbank's shareholders.


The controversy centers around a trading strategy called "dividend arbitrage," or "div-arb," in which large foreign investors lend out their holdings of German stocks so they are not on their books at dividend time.


The borrower is a German fund or bank that doesn't have to pay the 15 percent dividend tax that applies to foreign investors. After dividend time, the shares get returned. The tax savings are then split among the investors, banks and other players.


Confidential documents obtained by ProPublica identified Commerzbank as a key "end-user," where borrowed shares can be parked temporarily to avoid withholding taxes. They also named a who's who of global banks that enable the transactions and major investment managers that lend out German stocks.


Commerzbank's share price dropped nearly 10 percent since news of its involvement and a weak earnings report, and German politicians said they were shocked to learn that the bank helped investors avoid taxes.


One member of parliament called Commerzbank "morally bankrupt." Thomas Schäfer, finance minister for Hessen 2014 home to Frankfurt, Germany's financial capital 2014 called div-arb "pure tax trickery on the back of society" and warned that banks who engage in the practice face "loss of credibility and image" that can outweigh any profits gained from such transactions.


Schäuble is the highest-ranking German official to criticize the transactions. His agency has proposed legislation to stop the trades by making them too risky. A parliamentary hearing is set for next week.


At a news conference Wednesday, Schäuble sought to explain why, under current German law, the government may not be able to recover the tax revenue it has lost from the transactions.


"One paragraph in the general tax code says that if you use some tax instruments to avoid tax paying and if there is no economic purpose, then there could be a misuse," Schäuble said. "Excessive use of these instruments is not legitimate."


But Schäubleadded: "As long as these instruments, according to the highest courts, are and were not illegal until today, I cannot reclaim tax money."


Following is some of the other reaction inside Germany:


This article was written by Cezary Podkul, with reporting contributed by Arne Meyer-Fünffinger of Bayerischer Rundfunk in Berlin and staff of the Handelsblatt newspaper. Research and translation contributed by Jennifer Stahl.


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