Tuesday, October 15, 2013

Alliance Boots accused of dodging $1.8bn in tax

From Reuters:
A British charity and a labour union accused Europe's largest pharmacy chain, Alliance Boots, of avoiding over 1.1 billion pounds ($1.76 billion) in UK tax since 2008 and called on the government to change laws which allow such tax planning.
The report is available from War on Want, one of the co-authors, along with Change to Win and Unite.  This graph (click to enlarge) that is drawn from the report itself illustrates this particular variant of unproductive, inefficient, rent-seeking nonsense at the heart of the private equity model. What aggregate good does anything in that picture serve?

Private equity is capitalism at its least creative: hoovering up the vast amount of intellectual knowledge that has been created by vast amounts of state-funded education, free-riding on all that, then hoovering up tax subsidies, then leveraging it all up to create supposedly superior returns for investors. (See below about all of that.)

The report explains the brief history:
In 2007, Alliance Boots left the FTSE 100 by becoming a privately held firm in Europe’s largest ever leveraged buyout (LBO). The transaction was led by US private equity firm Kohlberg Kravis Roberts and Co. L.P. and the company’s Executive Chairman Stefano Pessina, a billionaire resident of Monaco. The LBO was financed largely with £9 billion in borrowings, more than 12 times the company’s EBITDA (earnings before interest, tax, depreciation and amortisation).

By taking on this level of debt, private equity-backed firms like Alliance Boots have the potential to erode the tax base in the country where they locate their borrowings. Profits are, in effect, shifted abroad.
. . .
In 2008, Alliance Boots relocated to the low-tax canton of Zug, Switzerland, even though the company generates no revenue there. Several Pessina and KKR-related entities with stakes in Alliance Boots operate in other tax havens such as Gibraltar, Luxembourg, and the Cayman Islands. The limited financial disclosure that these tax havens require makes
it difficult to determine beneficial ownership of companies that are related to, and in some cases, doing business with Alliance Boots, and how that impacts the tax payment by the company and its owners.
In his book The Great Tax Robbery, UK tax expert Richard Brooks described just how artificial this Swiss relocation was:
"When in 2012 I called on the Swiss company, Alliance Boots GmBH, at its 94 Baarerstrasse, Zug address, it turned out to be one of around fifty unrelated companies dealt with by a local business service company, the proprietors of which were not too pleased with the visit, and had no Boots personnel present.
. . .
Similar destruction of tax bills was reported in just about all the big private equity takeovers of the 2000s."
Even after all this, at least there are those superior returns to investors. That is worth something at least.

Or is it? Are those returns really superior?

The answer, it seems, is no! Not at all. Take a look at this, if you are still in any doubt, and weep for the financialised state of the United Kingdom - and many other countries.

Is there any economic justification for this tax-dodging, tax haven-diving private equity model nonsense?

Not that we can see. As that article noted about Mayfair, that Central London home of private equity firms:
"Mayfair would be far more economically productive if it were turned into a giant waste-disposal centre."
 This report makes a useful addition to the literature.

Update: for more on corporate tax see here.


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