Wednesday, January 26, 2011

The tax dodging behind your chemo

Yesterday we blogged on the awful irony that UK private sector Boots the Chemist, a tax dodger since shifting its headquarters to Switzerland, may soon be providing life-saving taxpayer-funded services in chemotherapy and other forms of treatment currently supplied through the National Health Service.

Boots the Chemist, a high street stalwart in the UK for many years, was bought out in 2008 by New York City-based Kohlberg Kravis Roberts, or KKR, a private equity firm which was the event leading to its move to Switzerland.

In 2008, KKR were the 2nd biggest employer of labour within the USA, (after Walmart - and may still be, but we have not checked). Other companies owned by KKR include private healthcare related businesses, as well as systems for military and private intelligence, pet care, and toys amongst others. So, these are the people who may be in charge of giving you your life-saving treatment if you should be unfortunate enough to need chemo in the UK.

Anyway, back to tax:

At the time of buying out Boots, KKR was based in Guernsey. In July 2010, KKR set up a corporate subsidiary that listed on the New York Stock Exchange. This, perhaps unsurprisingly, involved a tax dodge. Check out Fortune's article KKR: Living the tax dream you can't, and A Taxing Blog by Victor Fleischer, Associate Professor of Law, University of Colorado: What KKR shareholders should know about taxes.

If you don't feel like contemplating the numbers detail, here's a very brief summary: the corporate subsidiary can increase the stated value of its assets based on the gain realized by insiders who sell some or all of their stake in the company. (Insiders, of course, being the 2 partners in this case.) This written-up value is tax-deductible to the corporation over 15 years, with the tax savings flowing through to the partnership.

Does this saving get passed on the regular investor? Nope. 85% of it goes to the insiders themselves.

The net effect is that the amount of the personal income tax paid by the owners/insiders on any gain in selling their stake, is effectively negated by the amount they receive back from the partnership. In 2009, the two co-founders and owners were reported to have been paid about $22million each in cash compensation.

If all this annoys you, try this refreshing bar-room rant by comedian Lewis Black, on seeing a newspaper report "As KKR and Kravis Win Big, Taxpayers and Workers Lose Big".

And note the superb UK protest movement UKUncut, which has taken quite an interest in the Boots issue, and is creating plans to "turn Boots into a hospital." Join them if you can.


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