Private Equity and Tax Revenues

Private equity growth hitting tax revenues

Financial Times

October 12, 2006

According to top revenue officials at a recent international meeting in Seoul, the rapid growth of the private equity industry is likely to lead to lower tax revenues worldwide. The meeting organized by the OECD brought together tax officials from a number of different countries. At the meeting, officials expressed concern over the burgeoning growth of the private equity growth industry, which they believe could result in many of the large conglomerates becoming less transparent about their tax affairs and their corporate governance structures in general.

Some analysts have also highlighted that since private equity firms place an emphasis on minimize tax bills, total tax revenues are likely to fall as private equity firms assume control of an increasing number of firms. A recent Citigroup study found that private equity funds in addition to altering capital structures were very focused on “how tax can be used to generate value.” The study also found that the industry was compelling many companies to transfer their tax residency to lower tax countries. This is especially widespread in the European Union where tax migration is relatively simple.

Of course many critics including the global head of tax at big-four firm KPMG, Loughlin Hickey, have labeled the concerns advanced at this Seoul meeting outlandish. They claim that tax officials should instead be concerned about decreasing regulation and scrutiny which were the driving force of the private equity industry.

Questions

1. In recent times many private equity funds have shifted their focus to developing countries. If tax revenues of governments do fall, how might this affect the growth prospects of such developing countries?

2. Is the solution increasing regulation of the private equity industry or decreasing it as advanced by Loughlin Hickey?