BlackRock Case: What Every Tax Professional Should Know

Borys Ulanenko
 
This is a summary of the UK First-tier Tribunal (Tax Chamber) decision on BlackRock HoldCo 5 LLC and The Commissioners for Her Majesty’s Revenue and Customs (HMRC) published on November 3, 2020. The case refers to the 2009 deal between BlackRock Group and Barclays Global Investors (BGI). The deal included the purchase of Barclays exchange-traded fund business, iShares. You may even own some of these exchange-traded fund shares, as they are among the most popular ETFs on the market!
 
In 2009, New York-based BlackRock agreed to pay $13.5 billion to acquire London-based Barclays' investment management business. The transfer pricing dispute between BlackRock and HMRC, though, is around how BlackRock structured this transaction. The structure of the deal involved intra-group loan notes, which was subject to debate. 
 
If you are interested in gaining fundamental knowledge about transfer pricing aspects of financial transactions, check Module 13 of our transfer pricing course.
 
The BlackRock-BGI deal structure
 
BlackRock Group requested advice from external consultants (EY) on how to arrange a potential acquisition transaction. The advice was not just focused on tax risks and optimization considerations but also on commercial and regulatory factors. The financial industry is highly regulated, and therefore the deal had to comply with rules and regulations both in the UK and the US. 
 
Ultimately, BlackRock Group decided to structure the acquisition by arranging several holding companies. These entities were registered in the State of Delaware (the US). At the same time, the company that received an intra-group loan (BlackRock HoldCo 5 LLC) was resident in the UK, based on the fact that the place of central management and control of BlackRock HoldCo 5 LLC was in the UK. In one of the emails, the structure used by BlackRock Group was called a “US/UK Sandwich.” The deal structure involved providing the intra-group loan (via issuing loan notes) to UK-resident BlackRock HoldCo 5 LLC.
From the facts of the case, it appears that the main purpose of adding the UK resident to otherwise wholly US structure was to ensure that potential changes to the US “check the box” regulations will not lead to significant adverse US tax consequences.    
 
Another consideration (that ultimately did not prevail but was also discussed by BlackRock tax team with EY advisors) was “debt push-down” possibility.

Debt push-down: a simple example (for educational purposes)
  1. Purchaser establishes a new special purpose vehicle (SPV, an entity created for a particular defined purpose) in the target company's country.
  2. Another group’s company (often parent/treasury company) provides an intercompany loan to SPV for the acquisition.
  3. Debt is “pushed-down” using tax consolidation(tax grouping, fiscal unity) in the country of SPV/target company.
 
As a result, the interest deductions in SPV offset the profits of the target company.

Transactions under review and dispute points
 

To fund the acquisition, BlackRock HoldCo 5 LLC issued loan notes for approx. US$4bn to the parent company to finance the investment. There were four tranches with fixed interest rates (that were later adjusted downwards):

HMRC challenged the loan from two positions: stating that the loan was tax-driven (“unallowable purpose” issue), and whether the transaction would have happened if it had taken place between independent companies (“transfer pricing” issue). The table below summarizes the positions of the taxpayer, HMRC, and the Tribunal.
Conclusions 
 
There are several important takeaways from this case:
 
  • Economic substance and residence test are critical. When BlackRock HoldCo 5 LLC had to make important decisions on loan and acquisition, BlackRock’s tax team insisted on board meetings to be held in the UK (and even rescheduled the meeting to accommodate one of the directors). If BlackRock had not taken all precautionary matters, the position would be much weaker.
  • Transfer pricing does not always focus on the price (or interest rate), but also considers the transaction itself. The first question raised in the court was if parties had been independent, would they have entered into the loans at all?
     
In essence, the case was won thanks to strong tax function in 2009, not good lawyers in 2020. We have seen a lot of recent cases where heavy investment in litigation experts and lawyers did not pay back, mainly because the background case was weak.
 
There were several other interesting discussion points, and therefore we recommend reading the original case decision in full.

You can also read a more detailed transfer pricing analysis of the case by Dr. J. Harold McClure in MNE Tax. 
 
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