German Finance Industry Hit With $8 Billion Costs From Major Tax Fraud
Overview of the German Tax Fraud Scandal
FRANKFURT, July 13 (Reuters) - German financial firms face costs of around €7 billion ($8 billion) for their alleged role in a German tax fraud that has ensnared scores of banks and hundreds of individuals, German financial watchdog BaFin said on Monday.
Scope of the Investigation
• A survey by BaFin found that 73 banks, 21 insurers and 12 other financial firms had either booked or faced potential costs after investigations into the so-called cum-ex and cum-cum transactions.
Mechanics of the Fraudulent Schemes
Dividend Payout Manipulation
• Such schemes involved the stock trading of German companies around dividend payout days, which the authorities say have defrauded the state and taxpayers.
Historical Context and Impact
• The tax fraud flourished during the financial crisis and the authorities estimated it has stripped state coffers of billions; a years-long crackdown has since sought to claw back the money.
Breakdown of Financial Impact
Costs from Cum-Cum Trades
How Cum-Cum Trades Worked
• Some €4.82 billion of the hit were linked to the so-called cum-cum trades, in which foreign investors transferred their shares in German companies to domestic investors shortly before a company's dividend day because, unlike the foreigners, the domestic investors were not required to pay capital gains tax on the dividends. Afterward, the foreign investors got their shares back and paid the domestic investors a fee.
Costs from Cum-Ex Trades
How Cum-Ex Trades Worked
• A total of €2.2 billion in costs were related to the cum-ex trades, known also as dividend stripping, in which banks and investors would swiftly trade shares of companies around their dividend payout day, blurring stock ownership and allowing multiple parties to falsely reclaim tax rebates on dividends.
Exchange Rate Reference
($1 = 0.8746 euros)
(Reporting by Tom SimsEditing by Tomasz Janowski)
