Do you feel the private funds industry has become less aggressive, more conservative in its approach to tax risk?
We are managers investing on behalf of our investors. For this reason tax neutrality is a very important concept: one by which we have to live. Our approach is that if our investors – many of which qualify for various tax exemptions – could have made similar investments directly without incurring any tax, then we need to ask how we can accomplish this in our structures.
Our investors should philosophically pay only the tax that they would have owed if they invested directly; part of our job is to ensure that this is the case. That’s how we think of it.
So has maintaining this tax-neutral position become more difficult?
It has. And it will become more difficult as time goes by, given initiatives such as BEPS [the OECD’s global initiative to prevent base erosion and profits shifting], which is currently being implemented at a local territory level. Elements like the ‘principal purpose test’ and ‘limitations on benefits’ rules as part of application to benefits under a double tax treaty are giving us plenty to think about.
BEPS is such a wide-reaching initiative. Should it be welcomed by the private funds industry?
Philosophically, I would say ‘yes’. Ensuring that companies are doing the right thing and not avoiding tax is a noble, worthy cause. There are, however, challenges to an endeavour like this. BEPS was designed to prevent multinational companies creating structures to exploit different countries’ rules.
A lot of multinational businesses – and BEPS was created with multinationals in mind – have taken advantage of different structures and rules. But while the OECD’s cause is noble, the challenge here is that each country may well implement these rules differently. Thus an exercise that was intended to ensure rules are consistent could well result in a situation that is not vastly different to the one we started with, in terms of allowing egregious, aggressive tax structuring.
The concern for us has always been that we are investing as a fund with the goal of tax neutrality. BEPS, meanwhile, is written for multinational corporations… things like treaty provisions, country-by-country reporting… these have left a lot of people in our industry scratching their heads.
What is your assessment of the effect of new rules relating to interest deductibility – stemming from BEPS action four – on Carlyle’s business?
We have worked with our teams to analyze the various effect of debt-equity and interest deductibility rules on our portfolio companies in the relevant territories. Additional guidance was recently issued on the ‘group-wide’ rules, which is another example of where BEPS actions are difficult to fit to the private equity fund model. What exactly constitutes the ‘group’ for the purposes of the debt-equity ratio? Is the portfolio corporation deemed to be a portion of the group related to the fund?
So what was your assessment? Do interest deductibility rules have a significant impact on portfolio companies?
It’s early stages, and there is an awful lot of detail still to be ironed out and considered, but there will certainly be some effect. Will it be material? I don’t think so overall, but may be for a particular portfolio or jurisdiction.
Tell me about your role at Carlyle.
I am the managing director of global tax and my team’s responsibilities cover everything related to our investors, funds and transactions. We have a team of roughly 30 people looking at issues around the world relating in some way to tax.
My focus at any one time depends on the underlying businesses at that point and which of the businesses are most active and whether any specific tax issues are coming to light. Much of my time is spent advising on the structuring between the funds and the portfolio, as well as monitoring the changing legislative landscape globally – identifying structures that, for example, may no longer be workable.
Every time the law changes, it causes you to look at how you structure your activities. For example if you look at the recent changes in Asia (India, Korea, Australia, etc) and Europe (Anti Tax Avoidance Directive, Luxembourg, UK, etc), these are examples of things that would potentially cause us to explore different structures when making investments in those jurisdictions.
And what were you doing before joining Carlyle?
I spent about 30 years at PwC and public accounting, before joining Carlyle about two years ago.
Tax is an emotive and highly politicized subject. For example, carried interest is a frequent target for politicians on the campaign trail and offshore structures are often vilified. As head of tax, do you have to get involved in lobbying efforts for Carlyle to ensure lawmakers and the general public understand the firm’s position?
We certainly have a regulatory affairs team here and my team works closely to provide any support they need.. What we currently see is probably the most dramatically changing tax landscape I have seen in my entire tax career. I am not a lobbyist by trade, but I try to provide some relevant input into the discussions via our team.
Tell us about the changing tax landscape: any changes that particularly stand out?
At the moment every country is changing its tax laws. The UK, for example, is among the most dramatic: carry tax, non doms… not to mention Brexit. The UK has been keeping me and our teams very busy. FATCA and CRS… the list goes on and on.
So finally: what about Brexit? As a global firm with a presence in London, have there been discussions about relocating the London personnel to a different European hub?
Of course we have thought about it… not just from a tax perspective, but for regulatory reasons. Nothing is imminent in terms of changes, and it would be difficult really to say where our European headquarters really is… we are in a lot of places.
“If you look back a few years, BEPS and the related country-by-country reporting started largely because certain global corporations were perceived to be avoiding tax through basing subsidiary companies in various tax efficient locations,” says Doug Puckett, deputy national tax leader for private equity at Deloitte. “They typically have a lot of subsidiary companies but they are all ultimately controlled from the top: one board controlling the entire group.
“With respect to certain of the BEPS-related reporting requirements, a concern is that private equity may be treated by various countries’ tax authorities in much the same way – as one consolidated group. At its heart though, private equity is investing rather than operating and its portfolio of investments at any particular time is generally an unrelated mix of companies. Thus, you cannot gather information from these investee companies and get them to report in the same way that a corporate group can get its subsidiaries to report.”
This article is sponsored by Deloitte. It was published in the September supplement with pfm magazine.