Monday, July 02, 2007

Riots on the Streets

John Moulton, the founder of UK buy-out firm Alchemy partners, is preparing for a hearing of the UK Treasury Select Committee about private equity. His words to the Financial Times are interesting.

“I’m not sure it is riots on the streets yet. But it may not be far away, the way things are going . . . The industry certainly pays very low tax and that is not easy to justify. . . .“Buy-out firms are stacking up cash offshore in ways that look bloody wrong to me,” he said, referring to the practice of locating funds in overseas tax havens and keeping carried interest (the share of profits paid to partners) rolling over.

The BBC, meanwhile, discovered that Saga and the AA, two companies that are owned by private-equity businesses and are merging incurred no liability for corporation tax last year, and almost zero in their two-and-a-half years of private equity ownership. In the same period, the private equity owners of these businesses - Permira, CVC and Charterhouse - generated gains for themselves of £2.5bn. Not only do they benefit from preferential tax rates on capital gains, but, as the BBC said, "they inject huge debts into their companies, and the interest paid on these borrowings wipes out all taxable profit - thereby minimising liability to tax." (For more background on private equity, Richard Murphy has created a video discussing some of the issues.)

In an editorial, the FT had some words of advice for incoming UK chancellor (Finance Minister) Alistair Darling, now that his predecessor Gordon Brown has become Prime Minister.

"Mr. Darling should simplify taxation and regulation so that British companies can concentrate on business success rather than making money from compliance with some Treasury rules and avoidance of others. The purpose of taxation is to collect money with minimal distortions. If Mr Brown had understood this, Mr Darling would not now be facing rows over the taxation of private equity bosses."


Anonymous Anonymous said...

Nothing of substance will occur to alter this warped understanding of 'wealth' until the occurrence of the violence predicted by JK Galbraith when he said'People of privilege will always risk their their complete destruction rather than surrender any material part of their advantage'

5:12 pm  

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