It's the kind of magic worthy of a graduate of Hogwarts School of Witchcraft and Wizardry: Royal Bank of Scotland conjured up at least £1 billion pounds ($2 billion) in tax breaks by investing in controversial financing deals for Harry Potter films and a host of other blockbuster titles that involved no risk to the bank.
The transactions, which RBS has never disclosed, are revealed in hundreds of public filings by at least 25 companies set up by the bank to take part in movie "sale and leaseback" arrangements a decade ago. Those companies are still active and earning income for RBS, though they've been shifted to a division that houses unwanted assets for the remaining lifespan of the 15 to 20-year leases.
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The filings show that RBS owns rights to the third and fourth Harry Potter films, Troy, Batman Begins, Charlie and the Chocolate Factory, and at least 20 other movies, though the film titles aren't always listed in the available paperwork.
From 1998 until around 2007, RBS took advantage of the tax breaks without paying any production costs, or risking losses if the movies bombed. At least 10 of the transactions have been probed by the UK tax collection agency, according to company records. Between 2003 and 2006, RBS avoided or delayed paying about £1 billion in tax using the deals, according to calculations based on public filings and historic tax rates.
"These are highly artificial transactions done solely for tax avoidance reasons," said Jolyon Maugham, a tax lawyer who has represented investors in similar plans. That doesn't mean they were illegal or even aggressive, said Maugham, who has never worked for RBS.
An RBS spokeswoman said the leases complied with rules in force at the time, and that when the law changed in 2007, the bank exited the business. It worked with authorities to ensure it paid appropriate taxes, she said.
In 1997, the UK government introduced generous tax credits for companies involved in the booming film industry. Among the investments that emerged to take advantage of the rules were sale and leaseback deals.
Lawmakers later found the deals, while legal, benefited those seeking to avoid taxes more than they helped British filmmakers. The rules were tightened in 2007, and the revenue office began examining old cases and sending out tax bills to thousands of investors, resulting in at least a dozen court cases over arcane points of tax law. In two of the biggest trials, over partnerships called Eclipse and Samarkand owned by hundreds of individuals, judges found they weren't real movie businesses and investors shouldn't have gotten favourable tax treatment. Eclipse bought the rights to two Disney movies, Underdog and Enchanted, while Samarkand acquired The Queen, starring Helen Mirren.
In theory, the schemes simply deferred taxes because the later lease payments were taxable, but investors liked them because they allowed them to put their capital to use immediately. And for RBS, they've been particularly beneficial: The bank hasn't paid corporate taxes in recent years because it hasn't had any profits since 2008 -- when it got a £45 billion government bailout after coming close to collapse.
RBS typically bought a completed film, then leased it back to the studio for distribution to cinemas, on DVD, on television, and online. The studio agreed to pay a fixed annual sum to RBS over 15 to 21 years, so the bank wasn't on the hook if the movie lost money. RBS could reduce its taxable income by the cost of buying the film, and the studio would get a share of that benefit for allowing its product to be used. The studio also got an immediate cash return for the film that could be invested in other productions.
"The availability of these financing arrangements back in the early 2000s enabled us to bring large-budget films to the UK that may well not have been made here otherwise," said Deborah Lincoln, a spokeswoman for Warner Bros.
Though the RBS companies don't identify the films they funded and the bank declined to comment on the issue, the IMDB film database lists a firm called P of A Productions among the producers of Harry Potter and the Prisoner of Azkaban, released in 2004 by Warner Brothers. According to P of A's annual reports, the company is a unit of RBS and it has a 21- year "finance leasing arrangement for a film deal."
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"I would say we bid against RBS on at least a dozen occasions - all for larger films, mainly with Warner Bros, Disney and Sony," said Tim Levy, the founder of Future Capital Partners, which invested about $US10 billion in film tax structures. The movie studios got paid typically 3 to 12 per cent of the movie's costs for allowing it to be used, according to Levy, who said that figure rose to as much as 20 per cent for big budget productions such as Harry Potter.
P of A valued its movie lease at £143 million, and listed debts of £143 million in 2010, when the company said it was the subject of a British tax inquiry. The most recent company filings show that P of A was paid £5.6 million under the lease deal last year, virtually all of which went to repaying the loan used to buy the movie.
Another RBS company called Patalex IV Productions is listed as a producer on Harry Potter and the Goblet of Fire, released in 2005. Patalex III Productions was a producer on Batman Begins.
The total value of movie deals made by the companies is about £3.5 billion. Those 25 companies are linked to a single team at RBS and don't cover all the bank's film transactions. Based on Britain's corporate tax rate of 30 per cent for the period, RBS would have seen its tax bill cut by about £1 billion pounds over the period. Her Majesty's Revenue & Customs, the UK tax collection agency, declined to comment on RBS or its investments.
"HMRC treats all taxpayers the same: When HMRC believes a taxpayer has avoided tax, we will demand they pay the full amount due, which can include interest and penalties," the agency said in a statement.
The head of the RBS unit that did the deals, Alex Brown, left the bank in 2007 and now works at Barclays. His LinkedIn page describes his role at RBS as "leading a team in originating/executing structured tax and leveraged debt/mezz 'film slate' transactions. Grew embryonic business to one of the largest providers of capital globally in this sector." He declined to comment.