The Mail looks at the case of Alliance Boots, which was bought up by a private equity firm in 2008 and shifted (at least its legal base) to a nondescript building, 94 Baarerstrasse in Zug, Switzerland. A company which had a tax bill of £89 million in the last year it was quoted on the stock exchange cut its tax bill to a tenth of that amount now – even though sales and trading profits have consistently grown. The trick it used was an abusive transfer pricing trick known as \’thin capitalisation.\’ It\’s a horrible name, but the Mail explains it very simply, and very clearly.
As part of the takeover, Alliance Boots borrowed almost £9billion from various banks. That debt incurs interest, and interest payments can be offset against profits when calculating the company’s taxable income. A higher interest bill means lower profits — and less tax to pay.\”
And of course the place where it realises those profits are in Switzerland – where the taxes on those profits are small. Very simple to understand.
There\’s surely plenty more to the tax story than this – other jurisdictions will presumably have been involved too – but the basic point is entirely valid. This is straightforward, unadulterated, abuse: a transfer of wealth from taxpayers to extremely wealthy private equity officials.
That\’s the Tax Justice Network.
Apparently they\’re too dim to understand that while taxable profits have fallen as a result of the thin capitalisation, interest paid has necessarily risen by the same amount.
And, of course, interest is taxed when it reaches the recipient of that interest. If a company, at the same rate as corporation tax (for it will of course be corporation tax which is being paid) and if the recipient is an individual (the sort of rich individual that we might assume would be lending money to a company) at a rate higher than corporation tax.
So while Boots themselves might be handing over less tax it\’s not immediately apparent that less tax is being collected in the whole system as a result of this change to a thin capitalisation.
The move to Switzerland, one of the cornerstones of the EU being the free movement of companies around the EEA, just as with the free movement of individuals and goods, sure changed the amount of tax being collected: thin capitalisation, as I say, not proven.