In 2007, Alliance Boots left the FTSE 100 by becoming a
privately held firm in Europe’s largest ever leveraged
buyout (LBO). The transaction was led by US private
equity firm Kohlberg Kravis Roberts & Co. L.P. and the
company’s Executive Chairman Stefano Pessina, a
billionaire resident of Monaco. The LBO was financed
largely with £9 billion in borrowings, more than 12 times
the company’s EBITDA (earnings before interest, tax,
depreciation & amortisation).
By taking on this level of debt, private equity-backed
firms like Alliance Boots have the potential to erode the
tax base in the country where they locate their
borrowings. Profits are, in effect, shifted abroad.
While Alliance Boots operates in 25 countries, largely
through its wholesaling business, its more profitable
retail business is mostly in the UK. Because all or almost
all of the LBO debt was located in the UK, Alliance Boots
has been able to deduct its finance costs from taxable
income in its most profitable market. During the
six-year period since the buyout, we calculate that the
company was able to reduce its UK taxable income by an
estimated £4.2 billion compared to what it would have
paid had it not carried any debt, resulting in a tax bill
reduced by an estimated £1.12 to £1.28 billion in taxes.
There is no evidence whatsoever that the tax bill has been reduced by one red penny. It could actually have increased.
It is true that profits are taxed at the company level. Interest paid is taxed at the level of the recipient. That the company is no longer paying tax on profits means, here, that the recipients of the interest are paying tax on that. There is thus no, I repeat absolutely none, evidence that the total tax bill has gone down.