WATER ABLAZE - Patagonia Sin Represas

and 2003 – in other words, to almost all German CBL deals. The desired
tax benefits are now no longer guaranteed.
It remains to be seen how the U.S. business partners will react
to this. Against the background of lost tax privileges, fears are
justified that they will either endeavour to find an excuse to annul
the contracts or else to provide proof that the German municipalities
have committed breaches of contract and subsequently demand huge
financial penalties. According to the taz newspaper of November
13, 2004, the Bavarian Ministry of the Interior had warned that this
development might occur. As the chartered accountant Arnd Bühner
of Ernst & Young confirmed, German city and town treasurers have
recently been receiving mail from the IRS, informing them that the
leasing transactions were being looked into more closely. In 2005, U.S.
tax authorities wrote to Düsseldorf City Council, which had leased its
sewerage network and sewage purification plant, asking for certain
information. Because the councillors themselves did not know enough
about their CBL deal, they engaged the law firm Allen & Overy to make
their statements for them.
The position taken by the highest U.S. tax authorities on the
subject of CBL transactions is not so new that politicians in Germany
could not have been aware of it. On March 11, 1999 – long before
Chuck Grassley’s draft was conceived – a resolution was passed by
the IRS prohibiting Lease in/Lease out (LiLo) deals under section 467
of the Internal Revenue Code, on account of their lack of economic
substance. 30 This did not, however, cause the artful brokers to abandon
their efforts. They continued to work with Service Contracts until
2003 at least, developing even more hair-splitting constructions in the
process.
In addition to the amendments to U.S. law which came into force at
the end of 2004, there is the risk that withholding tax may be introduced
in America. In a Stuttgart City Council memorandum on the subject of
CBL deals, we can read: “In the highly unlikely event of the introduction
of withholding tax, the lessee has the precautionary right to replace his
chosen financial institutes by others whose headquarters are situated
in areas where jurisdiction is neutral with regard to withholding tax or
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