Barclays and Deutsche Bank helped more than a dozen hedge funds avoid paying more than $6 billion in taxes on securities trades through the use of structured financial products, The Washington Post reported yesterday. The report from the Senate Permanent Subcommittee on Investigations, due to be released today, arrives as the Obama administration is urging lawmakers to take action to stop American companies from reincorporating overseas in order to lower their tax bills, a practice known as tax inversion. The report shows that a number of firms are also relying on Wall Street banks to execute transactions in a way that allows them to circumvent federal taxes. At the heart of the report is the use of “basket options,” derivatives with a payoff that is tied to a pool of assets such as stocks, commodities or securities. The findings of the investigation will be the subject of a Senate panel hearing Tuesday, where senior executives from Barclays and Deutsche Bank are scheduled to testify. According to the report, the options structure also allowed hedge funds to borrow larger amounts of money to trade and exceed the federal leverage limits.
