KPMG Tax Liability Hits Deutsche Bank Profits

by Leroy Baker, Tax-News.com, New York

14 March 2006

Deutsche Bank was forced to annouce a surprise adjustment to its 2005 financial results last week to account for a liability connected to its role in helping KPMG clients avoid millions of dollars in taxes.

In a statement issued on Thursday, Germany's largest bank announced that "significant new information related to certain legal exposures" had emerged since the disclosure of the its preliminary 2005 earnings on 2 February 2006.

The statement continued:

"As a result of the new information, Deutsche Bank is obliged to change its estimate of contingent liabilities in order to comply with US GAAP, which requires that contingent liabilities be reflected in the financial statements when those liabilities are probable and estimable (Financial Accounting Standard Number 5). Any developments affecting such estimates must be reflected if they become known before the financial statements are finalized."

The bank explained that the adjustment related to certain tax-oriented transactions with US counterparties executed from approximately 1997 through 2001, which include transactions executed by a subsidiary of the former Bankers Trust, acquired by Deutsche Bank in 1999.

The statement added that the new information included, among other things, the entry by another German bank, HVB, into a deferred prosecution agreement with the US Department of Justice in respect of that financial institution’s involvement in similar transactions.

According to Deutsche Bank, the net increase in legal provisions will reduce the previously announced net income by EUR250 million.

Last August, 'Big Four' accounting firm KPMG reached an agreement with prosecutors over its sale of allegedly abusive tax shelters under which it will pay $456 million.

It is alleged that Deutsche was one of the firms which provided lending facilities allowing KPMG's "abusive" tax shelters, according to a report last year by the Senate permanent sub-committee on investigations.

However, the revelation appears to have done little to perturb investors as Deutsche Bank's share price rose by more than 1.5% on the morning of the announcement.

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