Analysis - The new hub of BMW's problems.

As corporate images go, there can’t be many looking as battered right now as that of BMW. The German car maker has been universally slated in recent weeks for its treatment of British manufacturing stalwart Rover. Only trade secretary Stephen Byers, himself feeling the heat over what he did and did not know about the deal, can be feeling as bruised. MPs, the press and taxi drivers have been quick to stick the boot inon BMW. But the latest attack on the Munich-based giant could be seen as unjustified. Reports that BMW transferred the assets of Land Rover to a Jersey-based company in order to avoid a #70m stamp duty charge first surfaced about 10 days ago. It looked like an unusual move and one that would again hurt UK plc, this time via the Treasury’s back pocket. But in reality BMW was doing little different to countless companies before it. A spokesman from BMW’s Munich headquarters told Accountancy Age the move was just part of the normal process when companies sold subsidiaries. ‘We have to outsource Land Rover out of the Rover Group to build an entity which could be transferred to the Ford Motor Company. We have to do it as part of the transaction,’ the spokesman said. The new Channel Island company will allow BMW to legally avoid paying the liability. The transaction is believed to have taken place two weeks ago. But whether there is a tax liability hinges on timing. The fact that BMW chose Jersey to set up the Land Rover assets as a separate company should not escape notice. As an offshore tax haven, the benefits are obvious. ‘It is taxable and one of the reasons is tax,’ the BMW spokesman agreed. But if there is to be a tax saving, of paramount importance is the fact the transfer must have taken place before BMW went too far down the track with Ford as a potential purchaser of Land Rover. If the $3bn sale of the Land Rover brand to rival manufacturer Ford was agreed before the transfer occurred then BMW would still be liable for the four per cent tax. Yet, on the other hand, if BMW had transferred the assets to a new offshore company earlier in the transaction process, it will effectively save three and a half per cent of tax on the sale – an effective rate of half a per cent. That difference in charges would save around #70m on the #1.8bn sale to Ford – enabling it to pay just an eighth of the charge had it sold Land Rover in the UK. However, BMW did sign a memorandum of understanding with Ford over the sale when it agreed to sell Rover to venture capitalist Alchemy and face the four per cent charge on the predicted #1.8bn sale. BMW will have to prove to the Inland Revenue that asset transfer occurs before sale arrangements are in place, but the Revenue could force a showdown if it proves the Ford memorandum was a sale arrangement. Tax experts say that many companies employ this sort of tax avoidance technique – legitimately. ‘It is not any kind of last minute attempt to avoid stamp duty,’ said Michael Quinlan, head of stamp duty at PricewaterhouseCoopers. ‘It is strategic tax planning and is open to all corporates.’ Adding further spice is the fact that the move comes just a month after Gordon Brown chose, in his Budget, to leave stamp duty loopholes open – despite mounting calls that billions of pounds of tax revenue is lost each year as companies shed subsidiaries and carry out routine tax avoidance. THE BMW STORY IS SET TO RUN AND RUN The current tax debate follows claims that Rover’s losses were exaggerated by the use of German accounting standards by BMW. Using UK accounting standards, Rover lost around #160m less for the year ending December 1998 than is stated in BMW’s accounts which were drawn up using German accounting standards. The controversy involving the relationship between the beleaguered UK car manufacturer and its German parent will continue for some time yet. Alchemy has pledged to switch to UK accounting standards once it completes its take over of Rover. If, as is expected, that cuts Rover’s losses, it is bound to reopen old wounds about whether Rover was fundamentally as unprofitable as BMW’s accounts showed.