JPMorgan (NYSE:JPM) giveth and JPMorgan taketh away. That is what the bank’s 2,000 former and current U.K.-based employees who have been asked to contribute towards a settlement with the U.K. government might be thinking.  But then, these employees also know that they will end up paying a larger amount as taxes to the British government if they don’t contribute to the settlement. JPMorgan is counting on the fact that the employees will pick the lesser of two evils to help it put to rest the nagging tax evasion charges levied by the U.K. Treasury over an employee fund the global financial group set up in the Channel Island.
We maintain $46 price estimate for JPMorgan’s shares, which is at a premium of about 10% to the current market price.
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Since the economic downturn of 2008, the British government has been clamping down on various tax evasion tactics used by the corporates for years in a bid to keep its budget under check. The U.K. banks RBS (NYSE:RBS) and Barclays (NYSE:BCS) have been under fire in the past for their use of tax havens to significantly cut down on paying taxes due on their operations in the U.K. (see British Firm Questions RBS and Barclays Use of Tax Havens). More recently, the focus shifted on U.S. firms after it was discovered that Starbucks (NASDAQ:SBUX) paid just about £8.4 million ($13.5 million) as taxes in the U.K. over a fourteen-year period.  Technology giants Google (NASDAQ:GOOG) and Amazon (NASDAQ:AMZN) are also under the scanner for evading millions in British taxes. 
JPMorgan came under the British tax department’s net for its use of an employee benefit trust (EBT) based out of Jersey to handle all bonus payments to employees over 20 years. The fund reportedly has between £2 billion and £9 billion ($3.2 billion to $14.4 billion) in assets, and estimates peg its tax liability at a minimum of £1 billion ($1.6 billion). Interestingly, most of the liability falls on the employees who benefited from the fund, with JPMorgan being responsible for just about a third of this value – the liability arising from its failing to pay towards national insurance over the period.
But the tax authorities are expected to settle with JPMorgan at around £500 million ($800 million), leaving employees with two options: contribute towards the settlement or stay out of it and potentially end up paying taxes at 52% for assets they have in the fund. Employees clearly stand to gain here if they are ready to contribute to the settlement, where the average value they forego won’t be more than 40%.
As for JPMorgan, the settlement will result in a minor spike in taxes for this year. As the trust cannot be used anymore, the banking group will also end up paying more taxes in the U.K. over the coming years, which should raise its total effective tax rate by a small value in the future.Notes:
- JPMorgan nears £500m bonus tax deal, Financial Times, Dec 7 2012 [↩] [↩]
- Special report: People power forces big business to pay up, The Independent, Dec 9 2012 [↩]