Tax tricks cost governments billions

Research shows that major tax evasion and avoidance schemes have cost governments around € 150 billion (£ 127 billion) in lost revenue.

The so-called cum-cum and cum-ex regimes are designed to exploit the weaknesses of national tax laws.

They apply to payments, or dividends, that companies make to shareholders.

The new data was calculated by a team of experts from the University of Mannheim, in collaboration with the German non-profit group Correctiv.

Evidence from leaked documents and people involved in the schemes suggests that British taxpayers have also lost, potentially in the tune of billions of pounds.

The research is part of a joint survey conducted by newsrooms around the world, coordinated by Correctiv, known as CumEx Files 2.0. It sheds new light on a growing scandal that first came to public attention in 2018.

Cum-ex trades were transactions in which shares were sold by one investor to another immediately prior to the payment of a dividend (cum, or with dividend) but delivered later (ex dividend).

This tactic actually created confusion as to who owned the shares at the time the dividend was paid. It allowed both parties to request refunds on the withholding tax, a levy that had only been paid once, at the time the dividend was issued.

This practice became popular in Germany in the early years of the century and continued until 2012 when the law was changed. It has also spread to other countries, notably Denmark, but also to France, Belgium, Italy and Austria.

In Germany, prosecutors have launched a wave of criminal investigations.

Several individuals have already been found guilty of tax evasion. Around 1,000 people are currently under investigation, including junior and senior banking staff, lawyers and brokers.

A list acquired by the German broadcaster ARD’s Panorama investigative program contains the names of over 700 people under scrutiny, of which 134 are known to be British citizens.

Although London has been widely identified as the place where many cum-ex trading strategies were conceived, the British exchequer was not a target, as dividends here are not subject to withholding tax.

But the documents show that bankers were able to carry out related operations to “launder” otherwise unusable German tax credits and generate profits at the expense of British taxpayers.

The complex system was based on so-called “overseas dividends” (MOD), payments made between the parties involved in the so-called short sales of shares borrowed in foreign companies.

It enabled investors to generate liabilities that could be offset against German tax credits and, at the same time, generate a UK tax credit.

Estimates vary on how much this scheme actually cost the UK taxpayer. An individual who has been involved in this type of operation in the past has suggested that it would be several hundred million pounds a year until 2005 – and more than 100 million pounds a year thereafter.

Another whistleblower told the BBC that “these were not small operations” and that the practice “must have been used on a significant scale”.

In 2014, HMRC changed the MOD taxation rules. He says this was done for a variety of reasons, including “reducing the potential for tax avoidance”.

While the aftermath of the cum-ex affair has dominated media attention and prosecutor interest so far, the latest findings from Correctiv’s investigation suggest that an even bigger scandal may be in preparation.

Cum-ex is believed to have cost governments nearly € 10 billion. But according to researchers at the University of Mannheim, this figure is dwarfed by losses resulting from another long-standing form of dividend arbitrage, known as cum-cum.

This strategy comes into play in countries where domestic and foreign investors are treated differently for tax purposes. A foreign investor will sell or lend shares just prior to paying the dividend to a second investor residing in the country where the company is listed.

The second party may apply for a dividend tax credit that would not have been available to the foreign investor. The shares can then be returned to the original owner and the benefits shared.

The Mannheim team calculated that between 2000 and 2020 this practice cost 10 governments, including those of Germany, Spain, France and the United States, for a total of 141 billion euros. He describes this estimate as “very conservative”.

However, it is less clear whether these losses will lead to legal proceedings.

While cum-ex involved generating multiple withholding tax claims that had only been paid once, and its use has been described as a “criminal act of tax fraud” by the German Federal Court of Justice, experts say cum -cum is located in a legally gray area.

“It’s not against the law,” explains Christoph Spengel, professor of international taxation and team leader in Mannheim.

“But in individual cases, it is against the law in Germany if the sole purpose of buying and repurchasing shares is to obtain a tax advantage.”