Merrill Lynch losses open up 'tax break' opportunity

US banking giant Merrill Lynch might not pay any corporation tax in the UK for several decades after channelling US$29bn (€19.73) of losses through its London operation, a report said today.

The group, which employs 8,000 people in London, posted the losses from the cut-price sale of billions of dollars worth of risky mortgage-backed US assets to its London-based arm Merrill Lynch International, the Financial Times said.

Under tax rules these losses can be carried forward against any future profits indefinitely. According to the FT, if Merrill's UK subsidiary were to continue to generate profits at 2006's record levels - when it paid $130m (€88.5m) in corporation tax - it would pay no tax for 60 years.

A spokesman for Merrill Lynch declined to comment.

The bank racked up the loss largely through the sale of collateralised debt obligations (CDOs) with a nominal value of $30bn (€20.4bn) to investment group Lone Star Funds for $6.7bn (€4.5bn).

In a document filed to the US Securities and Exchange Commission earlier this month, Merrill said it would suffer $29bn (€19.7bn) of UK losses as at the end of June this year after taking into account the sale of the CDOs.

"The loss has an unlimited carry forward period and a tax benefit has been recognised for the deferred tax asset with no valuation allowance," the filing document said.

Tax expert Robert Willens told the FT that Merrill's structure was "unusual".

He said: "Merrill has to be able to say that the UK subsidiary was the owner of those securities.

"It does not matter where the derivatives unit is based or where the trades were executed. The only thing that matters is who was the owner of the securities."

Other banks including Citigroup and UBS have suffered heavy losses as a result of the crisis, but these appear to have been booked largely in the US.

UBS, the Swiss bank, said earlier this week that most of the $42bn (€28.5bn) the bank had lost as a result of the sub-prime crisis were charged to its American operation.