Capitalism – taming (taxing!) the tiger?

PE Manager revisits some of the year's best guest articles: In August Ipes head Kevin Brennan explored why policy makers are prompted to restrain the effects of a capitalist society and what it means for fund managers’ exposure to increased regulation.

I like to work with basics and the opening wikipedia sentence for capitalism is ‘an economic system in which the means of production are privately owned and operated for profit’. This might double as a reasonable tag for private equity. A stark emphasis on the ‘profit’ element is apt and relevant to much that influences the burgeoning framework of legislation that we all face. It is the maximising of profit that leads to so many challenges against the owners of capital and the political calls to ‘tame the tiger’.

Owners of capital can enjoy the benefit of excellent returns simply for taking risk, the envy of those lower down the economic food chain. So far so good, but excess or exploitation by some takes the shine off of this efficient system. If profit is maximised through the avoidance of taxation or the balance between labour and capital interest is perceived as unjust, our political systems react. And when the politicians rise and deploy the democratic process the owners of capital face a reality – they are far outnumbered. These are age old realities but they do set a backdrop to what we face today with a seemingly increasing intensity.

Irrespective of the source of regulation/legislation or the targets that are sought, the cost of implementation is deployed across all of us and it is difficult to see where majority individual benefit arises. No where to go with this sentiment, we will have to settle for Hobson’s choice – comply!

Irrespective of the source of regulation/legislation or the targets that are sought, the cost of implementation is deployed across all of us and it is difficult to see where majority individual benefit arises

Kevin Brennan

I have always been taught that tax planning is acceptable but tax evasion is a ‘no no’. I suppose that argument depends on your political viewpoint but what is very clear is the IRS is determined to export its tax collection remit to all corners of the globe in order to stem tax revenue leakage due to evasion. As co-opted agents for the collection of US tax perhaps we could charge a commission! For the manifestation of the extension of tax collection or the exchange of information to support the same – see Dodd Frank and the upcoming FATCA legislation. 

I wonder how successful the EU would be attempting to inflict similar tax collection measures. Look no further, AIFMD is imminent and whilst its heritage is politically sourced following the economic crisis, the drive is fundamentally the same – to curb the perceived excess of the capital process and to drive transparency. AIFMD does major more on reporting and the curbing of exploitative processes but it also drives the use of institutional depositaries or as better known in the IRS terminology – QFI’s(Qualified Financial Intermediary). This alone will provide a perfect platform for an EU FATCA style era. A key platform of tax revenue success is to tax at source and to backstop with very open access to information.

Depositaries or QFI’s are a key upstream component to this strategy and serve as tax collection agents i.e. tax can be taken before an anonymous beneficiary receives payment.  Watch this space –the EU is developing the components of a powerful tax collection opportunity within the community. The EU Savings Directive is a good example of what can be done with focused legislation and the tax at source principle.


Anti-money laundering measures (AML) have already tackled the money transmission chain and the noose is tightening as the International Monetary Fund and Financial Action Task Force increase political pressure on all regulatory regimes to enforce the removal of anonymity from the investor. Ostensibly AML was implemented to fight terrorism and the laundering of criminal proceeds, but now ‘oh so’ conveniently secures information critical to the tax authorities chase for revenue.

Managers of capital won’t escape either as the ‘treatment as income’ noose tightens.

I speculate about a co-ordination of effort across the G20 zone. ‘Just because I am paranoid does not mean they are not out to get me’, springs to mind. I have always thought that the fair market value accounting standard was a perfect way to provide a capital tax mechanism on accruing value at source. Why?  A significant leakage to a tax revenue system is capital tax with investors using domicile as an avoidance measure. At some point political co-ordination may yet tackle this sacred cow.

A long time ago I recall a bumper sticker I saw in the US and I smiled – it read ‘Born free – taxed to death’. This sentiment has a certain resonance nowadays. Also, my viewpoint will, I guess, temper what I say, so for the record, I have always been a socialist saving up to be a capitalist!

In summary, it will be increasingly difficult for tax agile tigers (and Managers) to avoid the net and I will not be surprised to see new or continued deployment of the most versatile aspect of the capital world – mobility.

Kevin Brennan is Chief Executive for Ipes, a fund services provider to the private equity industry.