Now this is very interesting of CIBC.
nationalpost.com
How CIBC keeps money from the taxman
Offshore accounting
Derek DeCloet
Financial Post
When John Hunkin takes the stage in Halifax next week for the Canadian Imperial Bank of Commerce's annual meeting, he'll describe an
eventful year marked by the same difficulties other banks have faced.
And yet its results were respectable. CIBC earned $1.69-billion -- an 18% decline from the year before but still a better showing than
Bank of Montreal.
Its results were as good as they were because it did an unusually good job of keeping its money out of the taxman's hands. The bank
reported paying just $92-million in income taxes -- an effective tax rate of just 5%. No other major Canadian bank paid less than 27% of
its profit in income taxes, according to calculations in a report by National Bank Financial.
In effect, CIBC saved hundreds of millions of dollars in tax in 2001 -- preventing a much larger decline in its earnings.
How did it do it?
Nearly three months after the release of its year-end results, even some of Bay Street's most-respected bank analysts say they don't
fully understand it. At least one institutional investor has refused to buy CIBC shares until it provides a better explanation. One official at
a rival bank calls it "pretty amazing."
No one has suggested the bank is doing anything wrong. But after the collapse of Enron Corp., investors are highly sensitive to
accounting matters -- leading some to ask if CIBC is being aggressive in its tax accounting.
The bank's explanation of its unusually low tax rate is complex. But the primary factor is the geographic distribution of its profit -- that is,
where it makes its money.
During the 2001 fiscal year, CIBC earned very little money in North America, where corporate income taxes are relatively high. Its
pre-tax profits in Canada were almost completely wiped out by its losses in the United States, so it earned just $240-million in North
America.
So where did the rest of its $1.69-billion in profit come from? Most of it -- $1.2-billion -- came from its West Indies operations, according to a note in the bank's financial statements.
CIBC maintains subsidiaries in the Bahamas, Barbados and the Cayman Islands, among other offshore locales.
Corporate taxes in these places are low. By making almost three-quarters of its profit offshore, it was able to keep its overall tax rate low. That much is clear. What's less easy to figure
out is how CIBC reaped so much money from its West Indies subsidiaries.
Part of it can be explained by the bank's investment in Global Crossing Ltd., the Bermuda-based builder of telecommunications networks. Global Crossing filed for bankruptcy protection
last month, but CIBC has already used hedging strategies to secure a multi-billion-dollar windfall from its investment in the company.
In the past three years, CIBC has booked more than $2-billion in Global Crossing revenue. "The holding company [for that investment] is in the West Indies, so all the revenue flows
through there," said Stephen Forbes, director of investor and financial communications for the bank.
But Global Crossing doesn't account for all of the bank's apparent prosperity in the region. In fact, CIBC has reported almost $4.5-billion in revenue from its West Indies operations in
the past three years. And some $2-billion of that is interest income (the gains from Global Crossing are non-interest income, Mr. Forbes said).
CIBC has a retail and banking presence in Caribbean, but with 42 branches it is small. (By comparison, it has 1,170 branches in Canada.) It also has a wealth-management arm, a
treasury group, and "some other small operations," Mr. Forbes said. Overall, the bank's West Indies division is not large; it accounts for just 2.3% of the bank's non-interest expenses.
How can a bank earn so much money in low-tax countries with few staff and minimal expenses?
That's the part that remains a mystery. The bank does not disclose anything more about the nature of its West Indies operations.
One investor says he has asked the bank for details on why its tax rate is so low. "They provided us with an explanation that wasn't an explanation," said the investor, who spoke on
condition on anonymity. "But it's all supposedly legal."
Colin Litton, national director of KPMG LLP's banking and finance practice in Toronto, said scrutiny of Canadian banks is so tight that it's practically unthinkable any bank would risk the
wrath of tax authorities in Canada by bending the rules.
"These banks are under continuous audit from revenue authorities because, obviously, they're big taxpayers," Mr. Litton said. "You can rest assured that whatever figure is [reported], is
what the figure is."
Even so, the anonymous investor complains CIBC's disclosure is not good enough to make him comfortable.
In any event, CIBC's low tax rate is probably unsustainable. With a better economy, its losses in the high-tax U.S. ought to shrink. Its Global Crossing position is nearly exhausted,
meaning the bank's offshore revenue will decline in the future.
Mr. Forbes described last year's low tax rate as "an aberration" and said CIBC expects to pay out 20% to 25% of its pre-tax profit in income taxes in fiscal 2002.
Assume that the bank's projections are right and CIBC pays 22.5% of its profit in income taxes to various governments during this fiscal year. That means it will have to increase its
pre-tax earnings by 18%, or more than $330-million, to show the same profit this year as last year. |
