Mulling over the new UK tax issues laid on executive bonus payments, according to a report in this morning’s The Daily Telegraph, Goldman Sachs Group Inc. (GS) has reportedly deferred the announcement.
According to the paper, Goldman Sachs was supposed to announce the structure and magnitude of bonus payments worth more than $20 billion that will also be shared by its 32,000 employees. This will result in highest average payout in the banking industry, all exceeding the super-tax limit. After the deferment, they will have to wait until next week, possibly as late as January 28, according to the paper, to find about their personal bonuses.
Earlier this month, it was reported that Goldman Sachs had seriously considered various alternatives to prevent UK’s new 50% super-tax on the bonus payments. One such option reportedly included Goldman Sachs making a complete exit from the UK.
On Dec. 9, 2009, the British government declared a 50% tax for banks on bonuses exceeding £25,000, effective immediately. The bonus tax on banks was aimed to gain control over the multimillion-pound bonus payouts by an industry bailed out with taxpayer cash. The British authorities justify this logic as a simple encouragement tactic to retain more equity and less payout.
After the Troubled Asset Relief Program (TARP) issue, the UK’s new bonus tax law is reportedly causing a furor among the hundreds of non-British banks operating in the UK such as JPMorgan Chase & Co. (JPM), Citigroup Inc. (C), Bank of America Corp. (BAC) and Morgan Stanley (MS), all of whom are expected to announce their bonus payments soon. Although most of these companies have completely canceled or deferred cash bonuses and arranged the bonus in stock payments with a vesting period of 3-5 years, they have been under the radar for the high scale of bonuses that could otherwise be used for capital enhancement and growth purposes.
Hence, Goldman Sachs has deferred its payment announcement in order to consider effective steps to reduce this extra charge on the company and its staff. On Dec. 21, 2009, the company had reportedly warned the UK Treasury that it may move 20% of its London personnel to Spain as a result of this issue.
Goldman Sachs has ample leverage in the UK as it was the only bank that paid more than £2 billion to the Exchequer’s ailing reserves in corporation tax alone in fiscal 2008. Hence, it holds a bargaining position in the country. Goldman Sachs condemned the government for not providing a predictable tax environment and has appealed to take back or amend the new tax laws. While negotiations among the UK tax authority and the non-British bankers continues, we believe Goldman Sachs might also end up making no changes at all.
Generally, 45% of Goldman Sachs’ revenues are utilized for staff compensation. However, the company is expected to report a rise of 81% in its staff compensation for fiscal 2009 as compared to 2008. For the time being, we await further developments that are expected to be disclosed when the company releases its fourth quarter earnings on Jan. 21, 2010.
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Read the full analyst report on “MS”
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