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'Tis the season for American companies to pay their fair share in U.K. taxes, or possibly more so -- whatever the current Tory government is in the mood for. JPMorgan Chase (NYSE: JPM ) is the latest U.S. company caught up in Chancellor of the Exchequer George Osborne's crackdown on taxes for multinationals.
Pay now, or pay even more later
This past week, I wrote about how Starbucks (NASDAQ: SBUX ) is volunteering to pay $13 million-plus in taxes over the next two years, regardless of profitability, all because of the public outcry over the fact that it paid just $11 million in corporate income taxes since 1998. The company paid so little because it has been demonstrably unprofitable in the U.K.
Now, Financial Times is reporting that JPMorgan is close to an agreement to pay nearly $650 million in taxes the government says it avoided by using an offshore trust for bonuses paid out to its employees there. The bank will ask 2,000 employees to voluntarily contribute to the amount owed. Those who don't could end up owing even more once the trusts are liquidated.
The JPMorgan Jersey trust, as it's known, was set up 20 years ago. It's estimated there's between $2.5 billion and $11.5 billion currently in it. Given a 40% tax rate and a 12.5% contribution for national insurance, the notional tax bill could be as high as $1.3 billion. The way these trusts typically work is that while employees can't draw directly on their bonus money as held in the trust (if they do, they trigger the aforementioned taxes), they can take out unsecured loans against it, interest-free.
Hoist with their own petard
These offshore trust devices are not unusual; they are, in fact, perfectly legal. According to the FT, "JPMorgan's Jersey trust had previously operated with the full knowledge and authorization of U.K. tax authorities." There is, however, legislation in motion to outlaw them moving forward, but that has nothing to do with right now.
The U.K. is up against a wall -- a self-imposed one, it should be noted -- to reduce its deficit. This crackdown on multinationals is an easy way to pull in great piles of revenue without having to chop any more essential services from its austerity-weary citizens. And big fat multinationals make for big fat targets that are easy to whip up populist support against. Amazon.com (NASDAQ: AMZN ) and Google (NASDAQ: GOOGL ) are also in the spotlight, having recently named been named in a damning report by British lawmakers as engaging in "immoral" tax avoidance. We'll see if some similar fate lies ahead for them.
Since JPMorgan is asking the employees who benefited from the offshore trust to pay toward the settlement amount, it's not as if this more than half a billion dollars has to come straight off the bank's balance sheet (it could afford it, if that were the case), but that's not the point. Companies, or employees of those companies, who have paid taxes in the defined legal manner of the day shouldn't be required, or even asked, to suddenly pay more at the whim of a government that's dug itself into a hole it's having trouble getting itself out of. Does the U.K. want multinationals to invest in the U.K.? Bringing the jobs that come with it? If so, they have a funny way of showing it.
Thanks for reading and for thinking. I think JPMorgan is a great bank. It came through the financial crisis is excellent shape, in no small part because of the leadership of star CEO Jamie Dimon. And with a P/E of 9, it's also one of the great banking bargains out there. Find out more about this American superbank in The Motley Fool's just-published special report. In it, you'll learn where the key opportunities for JPMorgan lie, where its core growth will come from, all the potential business risks, and an analysis of its leadership team. Click here now for instant access.