U.K.'s Bonus Tax May Spark a London Exodus

By Matt Egan
Reprinted from FoxBusiness.com

The U.K.'s heavy tax on bankers' bonuses succeeded in getting the attention of industry titans, but new reports suggest it could also have an unintended consequence of derailing dreams of making London a serious rival to Wall Street. 

The tax, which was proposed last month and would levy a 50% hit to bonus payments above $41,000, represents the most aggressive move yet by governments dealing with a populist backlash over bailouts and bonuses. But some worry it could cause an exodus of big banks to more friendly locations. 

Already, Goldman Sachs (GS) is reportedly mulling relocating elsewhere in Europe and JPMorgan Chase (JPM) is apparently pondering shelving or scaling back plans to build a $2.4 billion headquarters in London's Canary Wharf. This is in addition to reports that Societe Generale, BNP Paribas (BNPQY) and HSBC (HBC) are thinking about similar moves.

“If leaders like Goldman and JPMorgan are so quickly making statements I would think it won’t be long before the other firms are going to jump onboard,” said Jeanne Branthover, head of executive search firm Boyden’s global financial services practice. “London is going to suffer if this really pans out, where there is an exodus of the major players in financial services.”

The U.K. said the tax will raise 500 million pounds, boosting the government's coffers at a time when it is running high deficits to fund rescue efforts to stem the financial crisis. But could the U.K. also be undermining its own efforts to build up London?

"The bonus tax is a one-off measure that does nothing to change the long-term attractiveness of London as a world-leading financial centre,” a U.K. Treasury spokesperson told FOX Business in an email. “The U.K. continues to have the lowest corporation tax rate of the major G7 economies and remains a highly competitive place to do business."

Still, the tax angered JPMorgan CEO Jamie Dimon enough for him to place a call to complain to U.K. Chancellor of the Exchequer Alistair Darling, the Financial Times reported. Dimon mentioned the plans for a European headquarters in Canary Wharf to Darling and is thinking about scrapping the effort due to the tax, the FT reported.

At the same time, the Times of London reported this week Goldman is reviewing whether to move some of its operations out of London to lower tax jurisdictions. However, it’s not clear this review has moved beyond a preliminary stage. In any case, if Goldman did move it would be a blow as the bank was the U.K.’s biggest financial-sector taxpayer last year, the paper reported.

“The goal of Goldman and JPMorgan is to retain their top talent and reward their top talent. To be restricted to do this is a concern,” said Branthover.

JPMorgan Chase did not respond to a request for comment. A U.K. Goldman spokeswoman declined to comment.

Since the U.K. tax was applied to the 2009 tax year, banks with U.K. operations won’t be able to escape it. Instead, some could be mulling a move to avoid future penalties and potentially stricter financial regulations on capital levels and proprietary trading.

“Bankers are super mad about the whole thing but I think some of the talk is going to [turn out to be just] blowing smoke,” said Erin Davis, a senior equity analyst at Morningstar who covers global banks. “Goldman Sachs is one of the more (aggressive) of the banks so they are one of the more likely ones to move. I just don’t think you are going to see wholesale movement out of the U.K.”

But if banks do turn elsewhere, what other locations could serve as an adequate substitute for London?

Don’t look for banks to relocate to France as French Finance Minister Christine Lagarde said last month France will look to impose a similar tax on bank bonuses in 2010. On the other hand, Switzerland could intrigue banks because Geneva already offers support services for the investment banking industry, including specialized law and accounting firms. But even Geneva could be difficult, as Bloomberg News recently noted that the city has a housing shortage, a 44% income tax rate and an overcrowded school system.

Ultimately, banks looking to move will need to consider where their employees are willing to go, especially considering how a transition to London is likely much easier than one to Singapore. And moves to cities where banks don’t already have a significant presence could be pricey.

Banks will also need to weigh the public-relations pros and cons of leaving due to high taxes on bonuses. After all, Goldman and other bailed-out banks have been heavily criticized for handing out record bonuses while most of America struggles with 10% unemployment.

“Some of the moves would be more difficult to detect. Not moving a headquarters to London is not the same as moving existing operations,” said Davis. “People’s memories on the subject will be short.”