Why the UK tax administration accuses General Electric of a billion dollar fraud
In 2012, General Electric’s Director of Tax Policy, Will Morris, received a trophy from HM Revenue & Customs, in recognition of his role in “informing the public debate on big business and taxation and convicting tax evasion and non-commercial abusive tax arrangements. ”.
Since then, the UK tax administration has ended its “external engagement rewards”. He also radically revised his vision for GE’s tax department.
In the first such case against a multinational, HMRC accuses the American industrial giant of fraud – and claims $ 1 billion in back taxes.
The lawsuit pits a newly asserted HMRC against an iconic American industrial name. If HMRC is successful, it would be one of the tax administration’s biggest victories against a global business. This could mark the start of a more aggressive approach to tackling complex tax evasion in the UK.
“This appears to be the first time that HMRC has accused a large corporation of engaging in fraudulent returns in order to gain a tax advantage,” said George Turner, director of think tank TaxWatch, which released a report on the case. . “It will send shock waves through the world of taxation. “
The deal is financially significant for GE, which, after racking up losses over the past four years, finds a $ 1 billion check quite painful to write. It also affects many other institutions, including Slaughter and May, the law firm that advised GE on the deal in question, and PwC, the Big Four accounting firm that now employs most of the former tax team. of GE, including Mr. Morris.
It comes from a time just before Christmas in 2005, when GE’s tax team – known in the industry as the “Harvard of tax services” – seemed to score another major victory.
The GE group included Roy Clark, UK tax director, Jan Martin, a Connecticut-based lawyer, and Mr Morris, a former British-born US Treasury official and part-time priest. He convinced HMRC to approve a tax deduction on a controversial transaction that would save the company hundreds of millions of dollars.
The deal, reached after six months of meetings with HMRC, meant GE could circulate billions of dollars between the US, UK and Australia without breaking new UK anti-arbitration tax laws, which came into force. force a few months earlier.
HMRC claimed to have been deceived by GE during the six months of negotiations to obtain a “triple dip” tax advantage in the three countries. He alleged that the US group misled its executives into believing that the transaction would be used to invest in an Australian company, when instead he claims that the money was moved into the group in the purpose of creating tax deductions.
He asked the High Court to overturn the 2005 deal, which would require GE to pay 15 years of taxes on the transaction, plus interest and fines, totaling more than $ 1 billion.
GE has denied misleading HMRC about the nature of the transaction. He counterattacked in an attempt to force the tax administration to drop the case. “GE complies with all applicable tax laws in all countries where we do business, and we reject the claims of the UK tax administration and vigorously challenge these false claims,” he said in a statement.
The UK tried to crack down on tax arbitration systems in 2005. Well-known names like Barclays had exploited a mismatch between tax rules in different countries to transfer money overseas and reduce their tax bill in the UK. their country.
Anti-arbitration laws allowed HMRC to block tax breaks claimed by a business in the UK if the business had claimed a deduction in another country for the same expense – a “double dip” benefit.
Concerned that the new rules could be applied to the transaction, GE called a meeting with HMRC on April 1. In addition to five GE representatives, attendees included Steve Edge, a senior partner at Slaughter and May, who advised the company, and, representing the UK government, senior tax official Dave Hartnett, who later became the permanent secretary of HMRC, and Ken Almand, a tax inspector.
The company argued that it should be entitled to tax relief on the Australian transaction because the interest payments used to fund business transactions are tax deductible and because its primary purpose was not to obtain a tax advantage in the United Kingdom.
Mr. Almand was skeptical. Five months after the start of negotiations, he wrote in an internal HMRC file: “Still no evidence of why the acquisition is UK-owned and still no convincing evidence as to why the acquisition was held. was 100% equity funded.
Despite his reservations, a deal was reached in December that cleared the Australian transaction under anti-arbitration rules.
Then, at the end of 2018, HMRC changed its mind. He said he received new information from the Australian tax authorities which paints a very different picture of the structure and purpose of the transaction. He filed a complaint with the High Court alleging that GE had made a “series of false statements”. Last May, he escalated matters, asking the court to change his case to a charge of fraud.
In court documents, HMRC claimed that its 2005 decision was based in part on the minutes of a GE board meeting in which crucial passages were deleted. The minutes he received led him to believe that the UK firm’s loans had been used to make a “long-term equity investment” in an Australian financial services company, HMRC claimed.
The full minutes – obtained by HMRC years later – showed that the loan was in fact part of a much larger circular cash flow through the GE companies and that “none of the borrowings were used for. acquire shares “in the Australian company, according to HMRC’s claim.
GE had borrowed $ 3.8 billion from an anonymous US bank which, in just four days, moved between operations in the US, Luxembourg, UK and Australia, before being returned to the same bank.
TaxWatch said: “From HMRC’s point of view, all of this confirmed what they had suspected from the start that the purpose of the so-called Australian investment was nothing more than to take advantage of an investment opportunity. UK tax arbitration.
HMRC told the Financial Times: “We are unable to comment on pending litigation. We make sure that every taxpayer, regardless of size, pays whatever they owe under UK law. “
GE denies any wrongdoing. His defense asserts that the missing minutes do not “constitute a material omission” and that they were presented to HMRC as an “extract” rather than a complete document. He indicates that HMRC was aware that the loan had been used to refinance intragroup debts.
“What [HMRC’s court claim] basically ignore[s] is the fact that the details of the Australian investment. . . were also presented orally, at length and in good faith by representatives of GE UK to representatives of HMRC, ”according to GE.
Last Friday, the High Court ruled that the HMRC may pursue its “fraudulent misrepresentation” case over the allegation that GE failed to disclose all relevant information about the Australian investment despite declaring the have done. “The essential allegation. . . that GE did not disclose the full picture and did so on purpose – will be allowed to stand trial, ”Judge Zacaroli wrote.
If the case goes to trial, as planned, in October 2021, it will involve other major institutions in the City of London. More than a decade after the transaction, GE transferred most of its global tax team to PwC, outsourcing its tax work to the accounting firm to reduce costs.
Among those who joined PwC were Mr. Morris, Rick D’Avino and Patrick Brown, who helped negotiate the 2005 deal with HMRC. But PwC also recruited from the other side, hiring Diane Hay, one of five HMRC officials who led the negotiations with GE. PwC has a third connection to the case: its legal department defends GE. This is an important instruction for the legal team at PwC, which reported sales of around £ 70million in the UK in 2018, comparable to a small law firm in the UK. city.
The advice Slaughter and May gave could also come under scrutiny. The case is expected to build on what was said at the first meeting between GE and HMRC on April 1, 2005. As a lawyer for GE at the time, Mr. Edge – a working tax law veteran with Slaughter and May since 1975 – was one of the key people in the room.
PwC, Slaughter and May and Mr Edge declined to comment.
GE says the purpose of the transactions was clear at the meeting. “The defendants will rely at trial on the evidence of representations that were actually made. . . as opposed to what is now simply inferred by HMRC, ”his defense said.