Goldman Sachs Group Inc. (GS) recently announced its serious consideration of various alternatives to prevent the UK’s new 50% super-tax on bonus payments of companies in a report published in London’s Daily Telegraph. One such alternative would be “entire departments going overseas,” according to the report.

On Dec 9, 2009, the British government declared a 50% tax for banks on the bonuses exceeding £25,000, effective immediately. Income tax levied on higher income individuals (earning more than £150,000) would also rise to 50%, effective April 2010. The bonus tax on banks is tendered out to gain control over the multimillion-pound bonus payouts by an industry bailed out by 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) trouble, the UK’s new bonus tax law is causing a furor among the hundreds of non-British banks operating in the UK such as JPMorgan Chase & Co. (JPM), BNP Paribas, Deutsche Bank AG (DB) and HSBC Holdings Plc (HBC). Goldman has decided to take serious and effective steps to reduce this extra charge on the company and its staff. On Dec 21, 2009, the company had warned the UK Treasury of moving 20% of its London personnel to Spain if it continues to be rigid.

The company is also looking through a more viable option that helps it retain its presence in UK avoiding the bonus tax. However, Goldman might relocate London’s more than 5000 staff overseas, if a pragmatic approach is evaded by the tax authorities.

Goldman has ample leverage in 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. While a strong network in Spain could be helpful to Goldman; a complete check out from UK could significantly hurt the UK Treasury coffers. Hence, it has a bargaining position in UK. The company 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, firms like Goldman and JPMorgan are keenly examining options to avoid the bonus tax as it will adversely affect the retention of its quality personnel. However, Goldman might also end up making no changes at all. For the time being, we remain on the edge for more developments pertaining to this scenario.

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