Hedge funds and Private Equity - PES

However, the fundamental reason these tax savings are possible lies in the very nature of corporation
tax, which consists of deductions from financial expenditure – and conversely of taxes on
financial income.
As described above one possible way to deal with the eroded tax base is to limit the form of
deductions allowed for interest expenditure by the local holding companies established to carry
out the takeover. Another possibility is to reduce the tax gains achieved through increased
indebtedness. In practice this would be to reduce corporation tax while at the same time supplementing
it with a tax on gross business capital. Such a tax would tax only the company’s primary
earnings, i.e. the financial account before taxation.
Introducing a new tax to stem tax ‘profits’ obtained through capital fund purchases may seem
like using a sledgehammer to crack a nut. However, a tax on gross business capital has other
features in its favour:
It does not distort companies’ investment decisions, which corporation tax does.
It makes it possible to reduce the taxation of financial capital, which is becoming increasingly
mobile and international
It is easy to collect, since the tax basis consists of the VAT basis minus wage expenditure.
The companies and the tax authorities thus already have the necessary information.
However, a tax on gross business capital is not entirely without its problems. Since it is founded
on the VAT basis, and does not include financial income in its tax basis, finance companies and
the VAT-exempt sector will be taxed at a lower rate if no compensatory taxation is imposed by
other means.
Part III – Lessons to be drawn for future regulation
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