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Private equity: a case study of some financial sector tax policy issues

Private equity: a case study of some financial sector tax policy issues. Geoff Lloyd Senior Adviser OECD Centre for Tax Policy and Administration. International Tax Dialogue, Beijing, 27 October 2009.

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Private equity: a case study of some financial sector tax policy issues

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  1. Private equity: a case study of some financial sector tax policy issues Geoff Lloyd Senior Adviser OECD Centre for Tax Policy and Administration International Tax Dialogue, Beijing, 27 October 2009 All comments represent the views of the author and not necessarily those of the OECD or its members

  2. Objective and Issues Objective: • to support healthy M&A and productive investment without tax-driven distortions, destabilisation and deadweight tax revenue costs Issues: • Taxation of target (and potential target) companies • Tax arbitrage in structuring of takeovers • Taxation of fund and investors • Taxation of general partners

  3. Taxation of target (and potential target) companies • Tax deductibility of interest a key factor in high levels of leverage in target (and potential target) companies • High gearing of target companies can eliminate CIT for years to come (and interest flows offshore) • Thin capitalisation rules may not displace market norms or unconnected party lending • Is interest on acquisition/ recapitalisation debt a business expense of the target company? • Best practices on interest relief for private equity? 3

  4. Tax arbitrage in structuring of transactions • Avoidance through hybrids to achieve distortive “double dips” • Treaty shopping to create tax free income and gains from a takeover • Partnership structures to convert income to capital gains • Tax arbitrage facilitates asset stripping strategies • Best practice “no double non-taxation” principle? 4

  5. Taxation of fund and investors • Uncertainties over fund tax treatment/ treaty entitlements/ treaty exchange of information provisions • Guard against incentives for low levels of investor/ partner tax compliance • Best practice tax transparency for fund/ investors 5

  6. Taxation of general partners • “Less tax than a cleaning lady” – Nicholas Ferguson, SVG Capital • “Sweat equity” – performance-based or investment-based compensation? • Case for entrepreneur tax reliefs remains • Best practice income taxation for investment manager activity 6

  7. Wider issues • Tax deductible leverage across the corporate sector • Widespread international tax arbitrage • Transparency over investment fund/ investor taxation • Labour/ capital income boundaries and incentives to risk 7

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