While corporate tax inversions have been the focus of attention because America has the highest corporate tax in the world which makes this country uncompetitive, so-called dividend arbitrage has raised concerns amongst bureaucrats who are finding very clever ways to soak up more private sector money. Big banks have been able to rake in as much as $1 billion per year in revenue by helping hedge funds and their major clients trim taxes through the complex strategy of dividend arbitrage.
When the IRS is hitting American like it never has before, creativity is required.
Trying to Work through an Expensive World
According to tax attorneys, the strategy involves the bank lending shares in a dividend generating stock owned by a hedge fund to a third party in a country with lower tax rates just when the dividend is about to be paid out. This helps reduce their tax liability on dividends to 10 percent or lower. While the third party earns a cut, the bank and their client also earn high returns which enables them to tolerate a world where health care is forced upon us and our taxes are raised all of the time.
As much as 1.5 trillion worth of shares and bonds are circulated and on loan for use in the strategy at any given point of time. This may help people deal with rising food and energy costs because of taxes and regulations.
The Federal Reserve Bank of Richmond recently raised concerns of the use of dividend arbitrage especially the reputational and legal implications. US regulators are focusing on the strategy more since the recent rise in tax inversions met with disapproval among the current socialists running America right now. Democrats have questioned the economic patriotism of companies that have resorted to using tax inversion strategies to avoid paying taxes even though these same companies already pay almost half their revenue to the tax man and employ millions of Americans.
But Uncle Sam is still not satisfied.
According to an estimate by the Joint Committee on Taxation, US corporations will avoid paying as much as $20 billion in taxes over the next decade due to tax inversions but they still give Uncle Sam $1 trillion or more in taxes so the Obama administration can fund abortion, offer subsidies to broken green energy companies, give weapons to our enemies in Pakistan and Egypt, pay people not to work and to collect food stamps, and drive up the national debt which will hit home eventually.
Some of the banks that arrange similar transfers of corporate stock using dividend arbitrage include Goldman Sachs, Citigroup Inc., Morgan Stanley, and Deutsche Bank AG. The banks collect a fee for such transactions. The companies to benefit from dividend-arbitrage trades include Lansdowne Partners Ltd and Och-Ziff Capital Management Group OZM in addition to banks that act as custodians of pension fund assets. These are financial institutions that pay billions in American taxes and employ thousands of Americans.
These are organizations that do not soap up taxes from society but rather give back to society. Unlike the FDA, State Department, unionized teachers, IRS, or the EPA, these are not bloated federal bureaucracies that kill jobs and push work overseas.
Trying to Survive
As long as the federal government grows larger and larger and offers fewer returns to the people, financial institutions will try to use dividend arbitrage to save money for their shareholders, charity, and their bottom line.