Barclays’ Tax Deals Face US Scrutiny

Barclays’ controversial tax planning business will come under fresh scrutiny in a U.S. court this week over whether a transaction designed by the bank cost the U.S. government more than $1 billion in lost tax receipts.

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The U.S. Internal Revenue Service claims that complex, cross-border deals Barclays structured for several mid-tier banks in the last decade were an abusive tax shelter that exploited loopholes between U.S. and U.K. tax laws.

The I.R.S will square off with Bank of New York Mellon in U.S. Tax Court in New York on Monday in the first of several lawsuits over the deals to come to trial.

Senior BNY executives as well as the star bankers that built Barclays’ famed Structured Capital Markets group face questioning over the structure, known as “structured trust advantaged repackaged securities” or Stars for short.

Roger Jenkins, the former head of SCM and one of the UK’s best-known dealmakers, and Iain Abrahams, a tax expert who now serves as an executive vice-chairman of the bank, have both been named as witnesses.

The case will cast fresh light on the inner workings of SCM, which Jenkins and Abrahams built into one of Barclays’ most profitable businesses prior to the financial crisis.

Stars was one of dozens of deals Barclays marketed to clients during that period, as one of the biggest operators in the niche world of structured tax planning.

At issue in the dispute is whether the transaction was a lawful way for BNY to obtain low-cost financing from Barclays, or whether it was designed to manufacture credits for foreign tax charges BNY never actually incurred, as the IRS contends.

“Barclays understood that BNY was highly receptive to a wide range of tax-based ideas and had targeted BNY for an SCM ‘tax product’ after discussions with BNY senior executives,” the IRS claimed in a court filing on March 27. “Tax arbitrage transactions were an important part of SCM’s business.”

As the first of several lawsuits over Stars to come to trial, the case is a crucial test of the I.R.S’s resolve to rein in aggressive tax planning by large, international companies. In total, six US banks participated in Stars deals with Barclays between 1999 and 2006, which the IRS claims generated $3.4 billion in foreign tax credits.

Five of those banks — BNY, BB&T , Sovereign (now part of Santander ), Wells Fargo and Wachovia (now a Wells Fargo subsidiary) — are contesting IRS decisions to disallow tax credits produced by Stars deals. Barclays is not a party to any of the cases and has not been accused of any wrongdoing by US tax authorities.

Jenkins, who is now a partner at Brazilian investment bank BTG Pactual and Abrahams declined to comment. The I.R.S, Barclays and BNY also declined to comment.