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Foreign Tax CreditOriginal Article published in the Wall Street JournalEdited by Jeffrey Taylor for clarity and content 3/24/09 - Some of the same banks that got government-funded payouts to settle contracts with AIG also turned to the insurer for help cutting their income taxes in the U.S. and Europe. The IRS is challenging some of the tax deals structured by AIG Financial Products Corp., the same unit of the New York company that has caused political ire over $165 million in employee bonuses. The company paid $61 million last year in disputed taxes stemming from the deals but sued the U.S. government last month in federal court in New York, seeking a refund, according to filings in the case. Banks that worked with AIG on tax deals include Crédit Agricole SA of France, Bank of Ireland and Bank of America. In general, AIG's tax deals permitted U.S. companies and foreign banks to effectively claim credit in their home country for a single tax payment, partly through the use of an offshore AIG subsidiary. In its lawsuit against the government, the insurer said it was told by the IRS that AIG hadn't shown that the transactions "had sufficient economic substance and business purpose" to justify tax benefits. The tax-structuring operation started by AIG in the 1990s was even bigger than AIG's credit-default-swaps business. Defenders of these arrangements say that taking advantage of differences between tax laws in the U.S. and overseas is simply smart business, arguing that the deals weren't explicitly prohibited by IRS regulations at the time. New versions of these foreign-tax-credit deals effectively stopped in 2007 after the IRS proposed regulations to end them. The agency has formed a special team of agents and attorneys to examine such transactions. Cross-border tax transactions are drawing increased scrutiny from U.S. and European tax officials, who are seeking to limit deals that help firms to play one nation's tax laws against another. This month, U.K. tax authorities said they were reviewing documents that show how Barclays PLC structured offshore deals for clients. Last week, IRS Commissioner Douglas Shulman told the Senate Finance Committee that the agency is "aggressively pursuing" so-called "foreign tax-credit generators." The foreign-tax-credit transactions took numerous forms. In one version, an offshore AIG subsidiary would borrow money from an overseas bank and also earn investment income overseas. The AIG unit would pay foreign taxes on that investment income and earn a foreign tax credit in the U.S. Another AIG unit would then pay interest to the foreign bank, deducting those payments from its U.S. taxes. Meanwhile, the foreign bank was exempt from tax on that interest because overseas tax authorities treated the bank as simultaneously owning the AIG subsidiary. That effectively gave the foreign bank credit for taxes paid by the AIG subsidiary. Because the foreign bank got a tax exemption overseas, it could charge lower interest costs on the cash loaned to AIG. AIG helped set up a complex transaction for France's Crédit Agricole that generated $17.8 million in tax savings for AIG and unspecified tax savings for Crédit Agricole. Last year, Crédit Agricole's Calyon investment-banking unit got $3.3 billion in payouts as part of the U.S. government's rescue of AIG. Barclays, which recently got $8.5 billion from AIG, also used the insurer's financial-products unit. Other AIG tax-cutting clients included Banca Commerciale Italiana SpA, now part of Intesa Sanpaolo. Bank of America worked with AIG on at least one tax structure. A key force in the AIG tax unit was David Ackert, a former lawyer at Sullivan & Cromwell LLP and banker at Goldman Sachs. While at Goldman, Mr. Ackert helped devise a tax shelter for drug giant Merck that was eventually part of a $2.3 billion IRS settlement in 2007. That was one of the largest publicly disclosed tax resolutions in U.S. history. In 1994, Mr. Ackert joined AIG and became a lieutenant to Joseph Cassano, the former head of AIG FP. In its complaint against the U.S., AIG details a transaction with Crédit Agricole, which provided three billion French francs (roughly $520 million) in "low-cost financing" to an AIG subsidiary for title to a newly created French entity. That entity paid French corporate income taxes, generating a foreign tax credit for AIG. Last year, the IRS disallowed AIG's claim for the foreign tax credit based on taxes paid as part of the Crédit Agricole deal. AIG worked with Barclays to form a tax venture called Pyrus Investments Ltd. The unit allowed both companies to claim joint tax credits for one tax payment. According to Pyrus corporate filings in the U.K., Pyrus has no employees. Its directors included Mr. Cassano, the former AIG executive, and members of a tax-structuring team at Barclays Capital, a Barclays unit. |
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