JPMorgan is nearing a settlement with the U.K. government in which the U.S. bank and its employees could pay close to 500 million pounds in back taxes that were avoided through the use of an offshore trust for bonus payments.
The Wall Street bank is in the final phase of winding up the Jersey-based arrangement and has asked more than 2,000 current and former employees to contribute to the settlement. Individuals who choose not to participate voluntarily could face a more expensive tax bill once their trust assets are liquidated.
The case comes at a sensitive time for relations between UK tax authorities and foreign companies operating in Britain. Starbucks on Thursday agreed to pay a 20 million pound tax "donation" following a public outcry over its payment of only 8.4 million in UK corporation tax over a 14-year period.
Trust schemes typically offer twin tax breaks by allowing companies and their employees to avoid paying, respectively, employer's national insurance contributions and income taxes. The trust holds bonus payments, which cannot be repatriated without triggering a tax payment. But employees can take interest-free loans from the trust on an unsecured basis.
Such schemes are being closed following the introduction of new legislation last year to outlaw employee benefit trusts. JPMorgan's Jersey trust had previously operated with the full knowledge and authorization of UK tax authorities.
It is unclear how much money is currently in JPMorgan's trust scheme, which was established 20 years ago. Senior executives involved in the scheme in recent years estimated the amount at between 2 billion and 9 billion pounds. Assuming a standard 40 per cent tax liability and 12.5 per cent rate for national insurance contributions, that would suggest a tax bill of at least 1 billion pounds. However, the settlement is understood to be closer to half that amount.
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JPMorgan declined to comment on specifics but said: "Our employee trust has always been transparent ... and its independent trustee has consistently paid taxes in accordance with UK tax law. In addition to taxes paid by the trust, JPMorgan has paid, on average, more than 1bn of [UK] corporation and payroll taxes ... annually over the past decade." The UK Treasury declined to comment.
JPMorgan is not unique in using trust arrangements to pay bonuses. Glasgow Rangers football club recently won a court case with UK tax authorities over its use of employee benefit trusts.
However, the bank's scheme is thought to be one of the biggest. It was also unusual in being structured for several years as a so-called family benefit trust, bankers said. This arrangement allows assets to be passed to heirs without triggering inheritance tax.
All senior bankers at the group were eligible for participation in the scheme, though US citizens were barred due to US tax laws.
Participants in the scheme said JPMorgan had given them until Friday to volunteer to pay tax at a rate of their choosing in a "blind auction" that would be used to establish an average contribution rate.
If the auction fails to generate enough money to pay the settlement, participants who bid below the overall average would be excluded from the agreement and face a 52 percent tax liability when the trust's assets are liquidated and repatriated. Several participants said they had volunteered to pay tax at a rate of 40 percent.
JPMorgan itself is understood to be on the hook itself for employer's national insurance payments as part of the settlement.