Cum-ex tax loophole isn't closed, warns German tax expert
01 March 2021 Belgium
Image: Sergey_Kelin/adobe.stock.com
Cum-ex schemes are still possible within German’s “very vulnerable” tax system warns a German tax academic who is helping EU member states recoup an estimated €55 billion defrauded by a global network of dividend tax refund fraudsters.
Speaking at the EU subcommittee on tax matters last week, Christoph Spengel, professor of taxation at Mannheim University, was among the expert witnesses to lambaste national regulators and tax authorities — particularly in his native Germany — for their on-going failure to address the problems that allowed the comprehensive pilfering of tax revenue in the early 2000s.
“Most experts believe this shortcoming was shut in 2012. This assumption is false,” he told committee members.
German tax laws were amended in 2012 following initial reports of a complex, cross-border trading strategy that utilised securities lending agreements to rapidly move assets into custodian banks in 11 European markets — primarily Germany, Denmark, France and Italy — who's legal framework are susceptible to allowing “double-dipping” on withholding tax claims.
The Cologne prosecutor is involved in more than 70 cum-ex cases, and more than 900 individuals are suspected of involvement in a global network, including bankers, brokers and lawyers that collaborated to cheat various EU tax authorities.
Although the first criminal case was only heard last year and many more are yet to begin, the cum-ex scandal is widely considered to be a thing of the past.
However, despite Germany accounting for roughly €32 billion of the €55 billion total tax revenue lost to cum-ex schemes, Spengel argues that national regulators and politicians are failing to grasp the nettle of known shortcomings in Germany's tax oversight.
He accused German authorities of ‘whitewashing’ when the fraud was brought to light and of inactivity in exploring possible solutions he and his colleagues had laid out to clampdown on future fraud, which primarily emphasised the need for international cooperation on tax and tax fraud matters and a beefed-up auditing force.
It is still possible to achieve a refund of the dividend withholding tax without it being paid, he explained in his opening address. This can happen if dividends are transferred by Clearstream to the foreign custodian bank of a non-resident shareholder and the underlying shares are sold ‘cum’ (with) the dividends before the dividend date and delivered afterwards ‘ex’ (without) to a German resident.
Spengel also called on the European Securities and Markets Authority (ESMA) to initiate a new investigation that dug deeper than the first into the data, while also going further to deduce whether ‘trade washing’ was also involved in the web on transactions used to dupe tax authorities. Trade washing is the illegal act of simultaneously buying and selling the same securities to complicate your trading book while also potentially sending phantom ‘buy’ or ‘sell’ signals into the market which may cause the share price to spike-based on false trading volumes.
The German regulator Bafin is overwhelmed with cum-ex and other scandals such as Wirecard, Spengel explained and therefore called for action on the EU level through ESMA.
The subcommittee also heard from Olaya Argüeso Pérez, editor-in-chief at Correctiv, an investigate media organisation at the heart of uncovering the cum-ex scandal, who said that the ease with which journalists from various countries could connect the dots while national authorities were oblivious showed that local action to tackle international fraudsters was not the solution.
According to Pérez, the €55 billion figure is the estimated losses from only five of the 11 markets believed to have been denied tax revenue from cum-ex schemes — Germany, France (€17 billion), Italy (€4.5 billion), Denmark (€1.7 billion), and Belgium (€201 million).
Pérez reinforced Spengel’s concerns that the wave of tax law changes at a national level did not succeed in stamping out cum-ex trading across the EU, with Finland, France, the Czech Republic, Italy, Norway, Poland and Spain among those still vulnerable.
“The trades may be theoretically banned but the fraudsters have found new tricky to go on with their business,” she said.
A third speaker was ESMA's head of markets and data reporting department Fabrizio Planta, who echoed Spengel sentiments that more needs to be done to equip national authorities to collaborate in tackling cross-border tax fraud.
Referring to the EU market watchdog’s 2020 report on the cum-ex/cum-cum schemes uncovered so far, Planta reiterated that ESMA’s opinion was that the scandal should primarily be considered a tax issue, not a securities lending one.
The report stressed that a first legislative and supervisory response should be sought within the boundaries of the tax legislative and supervisory framework, with a heavy emphasis on data sharing across borders — something not currently allowed under most national laws.
With a series of high-profile criminal cases against cum-ex suspects due this year as COVID-19-related restrictions on court hearings are lifted, the subcommittee questioned witnesses on the likelihood of European tax authorities recouping any of the lost revenue.
Spengel said he was “quite optimistic” because of the number of criminal cases due to play out soon which will build upon the Bonn ruling from last year.
The fact that these are criminal and not civil cases means the evidence threshold for a guilty verdict is higher but the statute of limitations is also longer; 15 years in Germany.
Crucially, a criminal case would enable prosecutors to seek damages not only from the defendants but also from related parties that benefited from the scheme.
Many of the individuals facing charges are no longer employed at the same organisation they were at during the period in question and many firms are seeking to paint former employees as rogue traders that acted unilaterally without the knowledge of senior management.
A guilty verdict in a criminal case would allow prosecutors to reclaim the tax damages from the entities that profited rather than trying to pin a potentially multi-billion euro tax bill on an individual.
Spengel concluded: “Everyone talks about a legal loophole but that’s a lie, there is no loophole in the tax law. There is a loophole in the system of collecting withholding tax and issuing a voucher. That has nothing to do with the legal issue. You don’t need to be a tax expert to know you can’t get a tax refund twice, anything else is nonsense.”
Speaking at the EU subcommittee on tax matters last week, Christoph Spengel, professor of taxation at Mannheim University, was among the expert witnesses to lambaste national regulators and tax authorities — particularly in his native Germany — for their on-going failure to address the problems that allowed the comprehensive pilfering of tax revenue in the early 2000s.
“Most experts believe this shortcoming was shut in 2012. This assumption is false,” he told committee members.
German tax laws were amended in 2012 following initial reports of a complex, cross-border trading strategy that utilised securities lending agreements to rapidly move assets into custodian banks in 11 European markets — primarily Germany, Denmark, France and Italy — who's legal framework are susceptible to allowing “double-dipping” on withholding tax claims.
The Cologne prosecutor is involved in more than 70 cum-ex cases, and more than 900 individuals are suspected of involvement in a global network, including bankers, brokers and lawyers that collaborated to cheat various EU tax authorities.
Although the first criminal case was only heard last year and many more are yet to begin, the cum-ex scandal is widely considered to be a thing of the past.
However, despite Germany accounting for roughly €32 billion of the €55 billion total tax revenue lost to cum-ex schemes, Spengel argues that national regulators and politicians are failing to grasp the nettle of known shortcomings in Germany's tax oversight.
He accused German authorities of ‘whitewashing’ when the fraud was brought to light and of inactivity in exploring possible solutions he and his colleagues had laid out to clampdown on future fraud, which primarily emphasised the need for international cooperation on tax and tax fraud matters and a beefed-up auditing force.
It is still possible to achieve a refund of the dividend withholding tax without it being paid, he explained in his opening address. This can happen if dividends are transferred by Clearstream to the foreign custodian bank of a non-resident shareholder and the underlying shares are sold ‘cum’ (with) the dividends before the dividend date and delivered afterwards ‘ex’ (without) to a German resident.
Spengel also called on the European Securities and Markets Authority (ESMA) to initiate a new investigation that dug deeper than the first into the data, while also going further to deduce whether ‘trade washing’ was also involved in the web on transactions used to dupe tax authorities. Trade washing is the illegal act of simultaneously buying and selling the same securities to complicate your trading book while also potentially sending phantom ‘buy’ or ‘sell’ signals into the market which may cause the share price to spike-based on false trading volumes.
The German regulator Bafin is overwhelmed with cum-ex and other scandals such as Wirecard, Spengel explained and therefore called for action on the EU level through ESMA.
The subcommittee also heard from Olaya Argüeso Pérez, editor-in-chief at Correctiv, an investigate media organisation at the heart of uncovering the cum-ex scandal, who said that the ease with which journalists from various countries could connect the dots while national authorities were oblivious showed that local action to tackle international fraudsters was not the solution.
According to Pérez, the €55 billion figure is the estimated losses from only five of the 11 markets believed to have been denied tax revenue from cum-ex schemes — Germany, France (€17 billion), Italy (€4.5 billion), Denmark (€1.7 billion), and Belgium (€201 million).
Pérez reinforced Spengel’s concerns that the wave of tax law changes at a national level did not succeed in stamping out cum-ex trading across the EU, with Finland, France, the Czech Republic, Italy, Norway, Poland and Spain among those still vulnerable.
“The trades may be theoretically banned but the fraudsters have found new tricky to go on with their business,” she said.
A third speaker was ESMA's head of markets and data reporting department Fabrizio Planta, who echoed Spengel sentiments that more needs to be done to equip national authorities to collaborate in tackling cross-border tax fraud.
Referring to the EU market watchdog’s 2020 report on the cum-ex/cum-cum schemes uncovered so far, Planta reiterated that ESMA’s opinion was that the scandal should primarily be considered a tax issue, not a securities lending one.
The report stressed that a first legislative and supervisory response should be sought within the boundaries of the tax legislative and supervisory framework, with a heavy emphasis on data sharing across borders — something not currently allowed under most national laws.
With a series of high-profile criminal cases against cum-ex suspects due this year as COVID-19-related restrictions on court hearings are lifted, the subcommittee questioned witnesses on the likelihood of European tax authorities recouping any of the lost revenue.
Spengel said he was “quite optimistic” because of the number of criminal cases due to play out soon which will build upon the Bonn ruling from last year.
The fact that these are criminal and not civil cases means the evidence threshold for a guilty verdict is higher but the statute of limitations is also longer; 15 years in Germany.
Crucially, a criminal case would enable prosecutors to seek damages not only from the defendants but also from related parties that benefited from the scheme.
Many of the individuals facing charges are no longer employed at the same organisation they were at during the period in question and many firms are seeking to paint former employees as rogue traders that acted unilaterally without the knowledge of senior management.
A guilty verdict in a criminal case would allow prosecutors to reclaim the tax damages from the entities that profited rather than trying to pin a potentially multi-billion euro tax bill on an individual.
Spengel concluded: “Everyone talks about a legal loophole but that’s a lie, there is no loophole in the tax law. There is a loophole in the system of collecting withholding tax and issuing a voucher. That has nothing to do with the legal issue. You don’t need to be a tax expert to know you can’t get a tax refund twice, anything else is nonsense.”
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