Corporates at odds with PE on global tax

A high percentage of companies in Asia and Europe welcome the idea of a standard corporate tax rate used globally; a goal unlikely to find support from private equity firms utilising offshore domiciles.

Multinationals in Europe and Asia would favour tax harmonisation globally, according to a report from tax advisory group Taxand, which surveyed an “exclusive selection” of multinational companies. However, private equity firms operating from offshore entities would not benefit due to low or non-existent tax rates in these locations.

In Asia, 91 percent of multinational companies would prefer tax harmonisation, with 67 percent in favour in Europe. Harmonisation would involve taxing all corporate transactions at a standard rate, something that has already been called for in the European Union under the Financial Transaction Tax proposal. 

According to Taxand, corporations in Asia lean towards tax harmonisation due to disputes over where firms should pay tax for certain transactions. The tax issue was highlighted by a high-profile dispute between UK-based Vodafone and the Indian tax authority over whether Vodafone would have to pay tax in India or elsewhere for its acquisition of a joint venture that held telecom licenses in India. 

For multinational corporations and private equity firms, the idea of tax harmonisation would make transactions easier, according to an industry lawyer. He said, “[Firms] would require less advice from specialists and you wouldn’t have to have so much structure in terms of tax arbitrage among [different] jurisdictions.”

However, private equity firms that are registered as offshore entities in tax-friendly locations such as Mauritius could lose out if a standard tax rate was levied on funds.

PE Asia’s source, who works at a law firm with offices at many popular offshore locations, said, “If an investor is going into a fund, knowing that the fund itself is going to have to pay tax in its own jurisdiction as opposed to being in, for example, Mauritius or more commonly the Cayman Islands where there is pretty much zero tax, then [private equity firms] would definitely be at a disadvantage.”

Countries want to control their own tax regimes, so I doubt a standard could ever be achieved

However, tax harmonisation efforts are unlikely to be effective, industry sources say. The report showed that only 55 percent of Asia-based respondents believed it possible, with 71 percent in the Americas saying it is not possible. 

Nicholas Bloy, co-founder of pan-Asian private equity firm Navis Capital, commented, “Countries want to control their own tax regimes, so I doubt a standard could ever be achieved.”

Robert Partridge, head of China private equity at Ernst & Young, agreed that to reach a standard tax rate would be impossible. “If everybody harmonised to the Hong Kong tax rate, everyone would be happy. But if you had to harmonise to the US, China or French rates, people would be pretty frustrated. Where there is such a wide disparity in tax rates, I wouldn’t see it as something even possible.”