Pressure is rising across the globe to raise taxes for private equity bosses, with German and Swedish authorities pushing for legislative changes and a leading US pension fund investor calling the 15 per cent rate in America “indefensible”.
Both the German and Swedish governments are considering proposals to lift tax rates for on the industry’s profit-sharing schemes, in what private equity executives say is likely going to trigger similarly sweeping changes across Europe.
In the US, the comments about the industry’s taxes by Joe Dear, investment chief of Californian pension fund Calpers, come as US President Barack Obama is demanding the wealthy pay more.
“General partners [in private equity companies] should recognise that tax treatment of their income has become indefensible,” Mr Dear said late on Monday.
Calpers is among the world’s largest investors in private equity funds and it has investments with Blackstone, Carlyle and KKR.
Mr Obama’s position is in deliberate contrast to that of Mitt Romney, one of his Republican opponents and a successful former private industry executive with Bain Capital. Mr Romney’s recently released returns show that he paid an average tax rate of 15 per cent in recent years.
The president’s 2013 budget proposal reiterated what he calls the “Buffett rule” – after the investor Warren Buffett – that anyone earning over $1m should pay a minimum 30 per cent rate, to ensure they are not taxed more favourably than their secretaries. The top marginal rate for ordinary income now stands at 35 per cent.
In Europe, buy-out managers enjoy preferential tax treatment on profit sharing schemes that are their main source of income in most countries, FT research shows.
But in Germany, four regional governments are studying a plan to remove an exemption clause which allows only 60 per cent of a private equity manager’s profits to be taxed.
In Sweden, tax authorities are pushing key executives from Nordic Capital, IK and Altor to retrospectively pay a 56 per cent rate of income tax – plus a 40 per cent penalty tax on past profits instead of the 30 per cent capital gains rate that they have already paid.
The authorities are also examining whether to charge higher taxes from executives at EQT Partners, Sweden’s largest private equity group and one of Europe’s biggest.
Private equity executives privately said this was only the starting point for continent-wide changes.
“We should stop whingeing about the tax and carried interest … this is an anomaly and it should and will get changed,” the head of a large UK buy-out group said. “People are very concerned about inequality and we have to recognize that and get on with our life.”
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