Financial Regulatory Forum

Deutsche Bank bonus-tax bill points to 2 billion pound windfall for UK

By Reuters Staff
February 5, 2010
Bonus baby

Bonus baby

LONDON/FRANKFURT, Feb 4 (Reuters) – Deutsche Bank has set aside 225 million euros ($312 million) to pay a one-off tax on bonuses in London, signalling Britain will land a hefty windfall from the levy but fall short of some lofty estimates.

Germany’s biggest bank was the first to say how much it will pay the British taxman. Its figure signalled Britain will raise at least 2 billion pounds — or four times early indications — from the controversial levy, based on conservative estimates.

Top-end estimates that the windfall could total over 5 billion pounds look likely to prove too high.

Deutsche employs about 8,000 in London. It did not say how many are subject to the 50 percent tax on any bonus over 25,000 pounds ($40,000), but it works out as an average of 25,000 pounds tax per employee, or a 50,000 pounds bonus per employee.

“We couldn’t not pay a bonus without jeopardising the franchise,” chief executive Josef Ackermann told analysts, saying the burden of the tax was being shared by investors and staff globally, through reduced payouts.

Deutsche’s payment indicated the tax could bring about 2 billion pounds into British coffers, based on estimates from analysts and individual banks that at least 75,000 people work in London’s investment banking sector.

Deferred share awards will also be subject to the tax.

Payouts at Goldman Sachs and elsewhere were expected to average more, while Royal Bank of Scotland and Citi are under pressure to pay less.

Britain had expected to raise 550 million pounds from the tax when it was announced less than two months ago. The government now expects to raise at least 2 billion pounds.

“They originally estimated 550 million to be collected from this tax. There is no doubt at all that it will be materially higher than that. It is difficult to know exactly but it will certainly be north of 2 billion, possibly as high as 4 billion,” said Jon Terry, head of reward at Pricewaterhouse Coopers.

“In terms of reducing bonus pools, they have been a lot less successful… Bonuses are not being reduced in proportion to the additional on-cost of the bank payroll tax.”

PAYDAY?

Most banks have recently told or will shortly tell staff their payouts, just as they announce annual results. News of the levy sent them scrambling to rework payout plans.

Banks are coming under increased political pressure, as the United States, Britain and elsewhere pick through the lessons of the financial crisis and try to appease public anger over pay.

Ackermann said on Thursday a proactive move to change regulation could be the answer, and banks had recently met in a closed door meeting to discuss ways of preventing regulators getting the upper hand.

Deutsche said it paid 11.3 billion euros in compensation last year, up 18 percent in 2008. The ratio of compensation to revenue, excluding the British tax and severance pay, fell to 37 percent, from an average of 44 percent from 2005-2007 before the ratio spiked higher in 2008 as revenues slumped.

Credit Suisse plans to cut its global bonus pool by 5 percent and bonuses for its top 400 managers in Britain by a further 30 percent to pay for the tax.

Last month, JPMorgan said it would pay a record $9.3 billion to its investment bankers, working out at about $379,000 per person, which could see its British levy alone top 300 million pounds, according to a conservative estimate.

(Reporting by Steve Slater and Clara Ferreira-Marques in London and Edward Taylor in Frankfurt; Editing by Dan Lalor) ($1 = 0.7207 euro = 0.6299 pound) ((steve.slater@reuters.com; +44 207 542 4367; Reuters Messaging: steve.slater.reuters.com@reuters.net))

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