A Schlupfloch Here, a loophole There. Now It’s Real Money

This story was co-published with The Washington Post.


I've written about tax loopholes for decades. But recently, I wrote about Schlupflöcher for the first time, in a venture that shows how journalists can be as multinational as investment banks. We just make a lot less money.


What does Schlupflöcher mean? I'm glad you asked. It's German for "loopholes." Which is the topic that Cezary Podkul of ProPublica and I wrote about last week. We showed how German tax law allowed American mutual fund investors, American fund companies and (naturally) American investment banks to all profit at the expense of German taxpayers.


Podkul and I conservatively estimated the revenue loss to the German treasury (and the gain to everyone else) at about $1 billion a year, but tax mavens in Germany whom I talked with after our article appeared think that the real number is $3 billion, if not more.


This particular tax game, "dividend arbitrage," is played in more than 20 countries, with Germany by far the biggest market.


Podkul and I decoded dividend arbitrage by using confidential documents that ProPublica obtained, and by going multinational and coordinating research with German broadcaster ARD and the Handelsblatt newspaper in Düsseldorf.


Our German partners 2014 including Pia Dangelmayer of ARD, who was a Burns fellow at ProPublica's New York headquarters 2014 handled much of the German reporting. Podkul and I worked the American end.


Serving our differing markets, Podkul and I wrote a U.S.-centric version for The Washington Post and ProPublica, while ARD and Handelsblatt stressed how Commerzbank, rescued by German taxpayers during the financial crisis, was helping drain revenue from the German treasury. Podkul and I found the irony of the Commerzbank connection irresistible, but we didn't dwell on it. Or on the fact that the German government still owns 15 percent of Commerzbank and has two seats on its board.


As a result of the uproar stirred by our partners' coverage in Germany, Commerzbank promptly promised to stop doing dividend arbitrage in Germany and elsewhere. "Div-arb," as it's known, is now being denounced publicly in Germany. Legislation that would make the div-arb game too risky and expensive for German institutions to play now seems likely to be enacted reasonably soon.


If you're not a German taxpayer 2014 which I'm not, and most of the people who read this aren't 2014 should you care about any of this? Absolutely.


First, the tale of how dividend arbitrage works and how we unraveled it in a multinational way shows how strange and wonderfully convoluted the world can be. Second, you can bet that the strategists who devised dividend arbitrage are exploiting the U.S. tax system in ways that we just haven't found yet.


I'll give you the short version of how dividend arbitrage works in Germany, because even thinking about the long version makes my teeth hurt.


Dividend arbitrage 2014 which was knocked out in the United States by tax law changes in 2010 2014 works in Germany because taxes are withheld on the dividends German companies pay, and because German tax law treats different shareholders in different ways.


Some shareholderswho pay German income tax can get credits for withheld dividend taxes, or even get refunds. Other shareholders, like sovereign wealth funds or U.S. mutual funds that don't pay German income tax, have to kiss that withheld tax goodbye. The taxes range from 15 percent for U.S. funds to 25 percent and more for certain other investors.


So middlemen enabled shares of German companies to migrate briefly from holders who can't use credits generated by the withholding tax to those who can. The long-term holder, the short-term holder and the deal makers combine to carve up the withheld tax, leaving nothing for the German treasury.


In the transactions that Podkul and I dissected, the long-term holder got about half the pot, the other players got the rest.


Because of public outrage and corporate embarrassment provoked by journalists obtaining access to confidential documents, one Schlupfloch (the singular for 2018loophole') in Germany seems on the way to being closed. With luck, the same will happen in some of the other countries where dividend arbitrage is still under way.


I would like to think that someday U.S. taxpayers will become as outraged as German taxpayers have become and that corporate players and their enablers will be as embarrassed as their German counterparts.


If enough anger and embarrassment ensue, maybe we can close notorious U.S. loopholes such as "carried interest" (which lets some money managers pay lower, capital gains taxes on their share of investors' profits) and "corporate inversion" (which lets corporations desert the United States for tax purposes while remaining here to benefit from what our country has to offer).


I'm not counting on that happening. But a year or two ago, no one was counting on the dividend arbitrage loophole in Germany being closed. German taxpayers lucked out. Maybe U.S. taxpayers can, too. And on that note, I bid you, "Auf Wiedersehen."


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Merge five SBI associate banks into one entity: AIBEA
The All India Bank Employees' Association (AIBEA) hopes the government accept its demand to merge the five associate banks of State Bank of India (SBI) into one entity, said a top union official on Saturday.
AIEBA general secretary C.H.Venkatachalam also said the union has called for a strike on June 7 and July 28 this year to press for the merger demand.
He also hoped that the boards of the five associate banks - State Bank of Travancore (SBT), State Bank of Mysore (SBM), State Bank of Hyderabad (SBH), State Bank of Bikaner and Jaipur (SBBJ) and State Bank of Patiala (SBP) - and also that of SBI would consider that proposal.
"Union Finance Minister Arun Jaitley also opined that the five associate banks of SBI could be merged into one thereby creating a strong entity," Venkatachalam told IANS.
He hoped the boards of the six banks in their next meeting would consider the merger proposal.
"Though on principle we are against consolidation in the banking industry, in the case of five associate banks, we prefer the same instead of each one merging into SBI," Venkatachalam said.
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.



MG Warrier

1 year ago

At this stage, all stakeholders should think in terms of restructuring the Indian Banking System with the stability of the financial sector, interests of the nation from the economic growth angle and protecting the interests of the depositors, borrowers, employees and shareholders of banks.

Roy Aranha

1 year ago

before merger knock off the flab and make these banks accountable like the private banks enough of bullying by the unions who are crippling the system no children of those in service should get employed into teh banks let them compete with the others too

Lufthansa plane blocks Mumbai airport runway, flights hit
The main runway at Chhatrapati Shivaji International Airport here was closed for operations after a Lufthansa flight suffered four tyre bursts late Friday, officials said on Saturday.
The Mumbai International Airport Ltd. has opened up the secondary runway for regular operations after the incident which led to flight delays or diversions as the main runway remained shut for nearly 15 hours till 3 p.m. on Saturday.
Officials were unsure when it would be reopened even as the Lufthansa Airlines officials were busy replacing the damaged tyres of the aircraft stranded on the main runway.
Four tyres of the landing gear of Airbus A-330 Munich-Mumbai flight LH764 were damaged after landing and the plane could not be moved. The incident took place around 10.45 p.m., the Lufthansa Airlines said in a statement on Saturday.
There were 163 passengers on board who were evacuated via stairs on the runway, and the return flight LH-765 of Saturday was cancelled, hitting the flight plans of 223 passengers. The airline was making efforts to rebook them on other flights.
The incident has hit flight operations with a Cathay Pacific cargo service being diverted to Hyderabad. Some other flights were compelled to offload cargo to operate from the secondary runway which does not enable a longer take-off run.
Another three services were delayed including an Air India flight and a United Airlines Mumbai-Newark flight. Emirates Airlines operated a B-777 instead of an A-380 while a Mumbai-Singapore flight SQ423 of Singapore Airlines with 427 passengers and 25 crew on board was also affected.
Singapore Airlines said passengers of the Airbus A-380 aircraft were provided with hotel accommodation and the revised departure plans of the flight would be determined after the main runway was opened for operations.
Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.


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